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 some individuals, but in others, 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 to avoid certain traps that can prove to be gravely detrimental to the economic status of an individual, post-retirement.
Retiring today is different
Today’s life style 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 relive one of the regular stresses of work life, it means more number of years to live without a regular earning in the form of a 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 thy pension make you feel satisfied:
Pension is paid out of annuities and the rates of annuities hover between 5.5% and 7%. 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 thou 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% to 7%.
Other apparent drawbacks of insurance policies are that the premium needs to be paid for long term and the returns are neither large 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. 10000 per month for 10 years will receive a return of 76 lakhs in 20 years if the rate of return in 10%, however the same money would grow to Rs. 49 lakhs in the same period of time if the yield rate is 6.5%.
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 does not come with any option for opting out and diversification.
FDs’ and other fixed income products shall not grant thou good returns:
It is often that people choose to invest in low risk items like FDs’ and other fixed income products in order to minimize 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.
Thou 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. However 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 décor, 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 materialize.
- 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 % while for commercial property it is pegged around 3-6 % 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.
Conclusion:
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.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in
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