Else, repent when you reach your golden years, says Ramalingam K
Illustration: Dominic Xavier/Rediff.com
According to Sander Levin 'Retirement security is often compared to a three-legged stool supported by social security, employer-provided pension funds, and private savings.'
This may be true in some countries and/or in case of some individuals, but where the social security system is not as robust, or the pension fund and personal savings are not adequate, the stool might topple.
A pragmatic approach to retirement planning can help avoid certain traps that can prove to be gravely detrimental to the financial status of an individual, post-retirement.
Retiring today is different
Today's lifestyle is different from what it used to be a few years ago. Work life has also become hectic and stressful so it is often that people look to seek early retirement.
While early retirement can relieve one of the regular stresses of work life, it means more number of years to live without a regular earning in the form of steady salary.
Building of a large corpus is the key to a contented life after retirement. Being aware of the mistakes that are commonly made while planning for an adequate retirement corpus, will better equip the readers to make wise choices.
Let not your pension make you feel satisfied
Pension is paid out of annuities and the rates of annuities hover between 5.5 per cent and 7 per cent, which is quite low. Moreover annuities are taxable in the hands of the individual who need to pay income tax on them.
Pension plans from insurance companies are no different.
In all cases annuities are taxable and since they are not linked to the inflation rates, its value remains the same throughout, almost.
So if anyone chooses to stake all his retirement money in annuities, then it is likely that he will end up with low returns and high stress levels.
Insurance policy alone will not serve your purpose
It is often that insurance agents recommend apparently lucrative policy schemes. However, more often than not, these policies are low return yielding options, with the returns hovering around 5 per cent to 7 per cent.
Other apparent drawback of insurance policies is that the premium needs to be paid for long term and the returns are neither big nor immediate.
The returns are however tax-free but a corpus evolving out of regular investments over a very long term in a low-yielding product like insurance policy can actually be counter productive.
An example would be a person investing Rs 10,000 per month for 20 years will receive a return of 73 lakh (compounded annually) in 20 years if the rate of return is 10 per cent; however the same money would grow to just Rs 49 lakh in the same period of time if the yield rate is 6.5 per cent.
This relative inflexibility of life insurance policies makes it a less than ideal choice for investments with respect to retirement planning.
Overall, life insurance polices are rigid, low yielding and do not come with any choice for opting out and diversification.
FDs and other fixed income products will not give you good returns
It is often that people choose to invest in low risk investments like FDs and other fixed income products in order to minimise their risk to market fluctuations. While this choice might be good for investing a small part of the funds, it will never yield good returns for the investor.
All these options are subject to tax and hence the overall return after tax will be even lower.
Individuals, by opting to play safe, lose out on the opportunity to earn greater returns. Moderate to balanced risk investments can help to garner better returns thereby resulting in the creation of a bigger corpus.
You will not get guaranteed returns by investing in property
Some people believe that investing in land or property is a fabulous option for making money grow. They dream of buying it cheap and selling it big.
One should remember that there is many a slip between the cup and the lip.
- There are instances where the property value has nose-dived leaving the investor woefully dejected.
- Encroachment is one big risk if the property is not regularly monitored.
- After buying a residential or commercial property one might invest in its decor, renovation and upkeep. However this additional cost is not factored at the time of sale of the property.
- At the point of sale, taxes also have to be borne by the seller.
- Property, or any immovable asset, is always difficult to sell because of its inherent illiquid nature.
- In an emergency when liquid cash is required readily, a property may not come in handy as its sale can take a long time to materialise.
- For those wanting rental returns from property it can be said that as per current trends rental returns from residential property is about 2-3 per cent while for commercial property it is pegged around 3-6 per cent on the prevailing market price. All of this income is taxable.
- The consequence is low yields and hence not always justifiable as an investment option at the time of retirement.
Based on the analysis it can be said that people on the verge of retirement or due to retire in the near future would do well to invest in financial assets which offer liquidity, predictability, better returns and taxation benefits.
By avoiding the above stated mistakes while planning for retirement one can be safe and happy.
Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading financial planning and wealth management company