One general perception among clients is that they will not live more than 65-70 years i.e. average life expectancy of India. Another myth is that even if they outlive the average life expectancy their children will take care of them.
As a result, most Indian investors do not invest enough for retirement. In fact, they continue to focus on other financial goals like buying a car, house, providing for children’s higher education and marriage often at the cost of providing adequately for their own retirement.
Here are four common myths related to retirement planning:
Average life expectancy is 65-70 years
With the advancement in medical science and growing affluence, the average life expectancy has been increasing. In fact, it is possible that the average life span of an individual could increase to 100 years in future. “I usually assume a 90 years life span for all my clients considering the advancement in medical treatments. Life expectancy has increased and hence financial planning based on old average lifespan could be dangerous for a client. Ideally, we should create a corpus that would provide for clients for at least 90 years,” said Chennai advisor Ramesh Bhat of Aniram.
Health insurance will cover all medical care costs post-retirement
Most clients believe health insurance is sufficient for all healthcare expenses post-retirement. This is not entirely true as mediclaim is limited to hospitalisation. “Medical situations can worsen quickly in old age and rising hospitalisation costs is a big issue. There are situations when a person gets bedridden and needs domiciliary treatment i.e. hiring a full time nurse. Such expenses are not included in health insurance. Hence, I advise clients to set aside at least Rs.5 lakh post retirement for contingency,” said Mumbai RIA Suresh Sadagopan of Ladder7 Financial Advisories.
A less risky portfolio is appropriate in retirement planning
There is a general perception that retired investors cannot digest volatility of equity funds and hence, should invest in fixed income funds. However, choosing a less risky asset class becomes more risky with increasing life expectancy. “Assume that a 65 year old client has received Rs.80 lakh on retirement. His life expectancy is 90 years and yearly expenses are 4 lakh. If he deploys this entire amount in fixed income products and earns 8.5%, his corpus would last for just 15 years if we assume a rate of inflation of 5%. This indicates that he would run out of money in just 15 years and will have no money to meet another 20 years of living expenses if he chooses to invest in fixed income products. Hence, we recommend retired investors to invest some portion of retirement corpus in equity funds for better risk adjusted returns,” said Bangalore RIA, Lovaii Navlakhi of International Money Matters.
EPFO is enough for retirement expenses
Thanks to partial withdrawal facility, most people redeem their EPFO corpus midway. As a result, they end up getting inadequate corpus at superannuation. “One statistics says that 80% of the EPFO accounts have Rs.20,000 or even less balance,” said Ramesh.
Ramesh believes that investors should keep aside a small amount from their income to invest in mutual funds through SIPs to create a retirement corpus.
