The most common mistake in Retirement planning is 'Not to plan for your Retirement'.
recent survey conducted by one of the world's largest bank claims that only 2% people plan and
save for their Retirement.
Of the people who actively plan for their retirement, majority of them fall prey to certain pitfalls that prove costly in their journey.
We have summarized common mistakes in Retirement Planning so that you can avoid them:-
1. Saving too less for the retirement goal
While you are saving, you need to be careful, if you are saving too little. There are proven methodologies, which helps one to find out what is the exact retirement corpus required.
One such freely available tool is Finatoz Retirement Calculator.
Factors such as inflation (which impacts our general expenses), rising health costs etc. are taken care in this calculator.
Also, most of us believe that savings 1.5 Lakh in PPF will be enough for our retirement.
While PPF is one of the preferred instruments to save money for the long term as the maturity amount is tax-free you may fall short for your retirement corpus if you rely only on PPF or similar products.
2. Considering investments in a plot / land parcel as retirement planning
We all just love land investments. And if it is a land at outskirts of the main city, we just love it even more !!
But we, should not confuse this with retirement corpus, as with every land investment there are inherently many disadvantages.
We list a few of them below:-
a. Not easy to liquidate: If for some reason you need your money urgently, it is not easy to sell and get your money out instantly. In most cases it will take more than 3 months and in some cases, even more, to get your money out of the land investments.
b. Partial exits are not possible: You are forced to sell the complete land holdings, even if you don't need the full amount. There is no easy way out to sell a partial land holding to fulfill your needs.
c. Very low rental yields: Many of us believe that it is a land holding & rents are a bonus on top of the land price appreciation. But we fail to realize that the rent is taxed. To top that regular maintenance of the house & brokerages paid further dents the rental yield.
If we take these factors into account, net rental yield amounts to less than 2% in most of the cases. Whereas, there are many tax-efficient avenues of investments available which can potentially give upwards of 8% annualized return.
3. Using FDs for savings
Savings in FDs are the least preferred option as the interest income is taxed. This results in very low effective yields on your investment and has an adverse effect on your retirement corpus.
4. Savings in Equity Mutual Funds
Mutual Funds are generally a good choice to invest for retirement planning.
However, it needs regular monitoring and tracking of your investments.
And even more importantly, it needs an informed decision as to what to track and monitor and what action should be taken if things are not going as per the plan.
This, in turn, results in higher risk being taken by the individual as there is no action taken during the adverse market conditions.
For ex: If one has started the investments journey in 2007 and has chosen monthly SIPs to be the way of investments, he needs some assurance and analysis, based on which he can continue with his / her investments when stock markets moved down in 2008.
As the total investments go down drastically, one needs an investment strategy to handle the downtrends in the market. Without a good investment strategy, you are likely to take a wrong decision at the wrong time.
Having discussed about some of the common mistakes, lets look at a possible better way of planning for your Retirement goal.
We would recommend that a 'Goal Based Investment' and 'Dynamic Asset Allocation' strategy is very well suited for most of the families who plan for their Retirement goal.
We have developed our proprietary investment model called “Finatoz Timing Model (FTM)” which is based on these principles. Investment using FTM will enable you to handle the overall risk in your portfolio in a much better way.
In case you want to know more and find out your retirement corpus need, please feel free to use our Retirement Calculator.
Interested in our retirement service offering. Contact us!