Life after retirement is often referred to as the golden years. But does everyone get to live a blissful life after retirement?
There are several things that could go wrong and improper financial planning is one among them. That's why it's very crucial that your clients have a plan in place that gives them adequate corpus to fund a comfortable life post retirement.
Since retirement planning is for a distant and uncertain future, investors are likely to make mistakes that end up hurting their golden years.
In this article, we will point out a few mistakes that investors should avoid while planning their retirement:
Not starting early: Those in the early phase of their career often avoid thinking about their retirement plan. Ideally, investors should keep aside a part of the savings for their retirement as and when they start earning as:
- Often, young individuals do have liabilities like home loan or education loan
- Starting early can give investors the power of compounding. For instance, Rs.1000 invested monthly for 20 years in a scheme that gives 10% annual return can fetch Rs.7.24 lakh compared to Rs.4.03 lakh on monthly investment of Rs.2000 for 10 years in a similar scheme.
Not accounting for inflation and taxes
Many of us keep our money lying idle in savings bank account where we get a mere 3-4% returns and don’t factor in the impact of inflation on our money. For instance, price of petrol per litre in Mumbai was Rs.76.31 on December 31, 2019 as against Rs.100.25 on May 31, 2021. This indicates petrol prices rose by almost 30% whereas Rs.100 in a savings account would have grown to Rs.104 after a year (assuming 4% interest). However, the value of your Rs.100 is effectively Rs. 70. Of course, while calculating inflation in reality, many other items are considered in addition to fuel!
Tax is another aspect that is often ignored. Taxes reduce the real rate of returns. In India, interest earned from bank fixed deposits are taxable. If your clients fall under 20% taxation, a bank FD offering 5.5% is giving them 4.8% effective returns.
Investment choice
Wrong choice of investment instruments can lead to subdued returns. It is really important to make sure that the allocation delivers a perfect mix of safety and return.
This can be done by spreading investment across various asset classes to reduce risk and earn better returns.Your clients should consider investing in retirement schemes offered by fund houses. These schemes invest across equity instruments to give capital appreciation and debt securities to give stability to investment portfolio. In addition, these schemes have potential to beat inflation and deliver better post tax returns over the long term.
Improper assessment of current, future financial goals
Not planning for short term goals and contingencies can jeopardise long term goals like retirement plan. Often people withdraw money from their retirement corpus for other financial goals or liabilities. MFDs should create an emergency corpus for their clients with at least six months of expenses before investing for retirement.
Waiting too long to clear debts
The last thing one would want is to pay EMIs from their retirement fund. Ensure that your clients enter their golden years debt free.
