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How To Become Your Own Financial Planner?

An exclusive Program To Develop The Skills To Manage Your Personal Finance

We believe by signing up for the initiative, you too endeavour to develop the skills needed to understand the nuances of personal finance and be money-wise.

Module V: Tested Ways To Retire Rich

The key to a successful retirement is to start planning prudently from the very first time because there might not be a second chance before you retire. Our experience shows most individuals believe they're on the right path to planning their retirement by merely investing in an ad-hoc manner, but that's not a 'prudent' approach.

According to US based Brooks Hamilton, 900 people of 1,000 persons will retire in poverty or run out of money before death in the US, which means, over 90% of individuals would be severely hit during retirement. The statistics cannot be more staggering than this! Whether it's the US or India, all retirees share the same concern.

So, let us look at the critical mistakes most people make while planning their retirement, and how you can avoid them in this session.

Session 14: 7 Common Mistakes You Should Avoid While Planning For Retirement

  1. Lack of Planning:

    Well, some people just fail to plan. As mentioned earlier, they believe investing in a n ad-hoc manner will help them to live the golden years in bliss. They forget that a financial plan is an important document, and its effective implementation can lead to long-term financial wellbeing. Most individuals ignore making one, until it's too late.

    Many individuals vie all the fancies of life -buying a dream home, car, planning for a vacation etc., yet the most important life goal- to live a comfortable retired life -seems to be ignored.

    You see, how well you have planned for your retirement decides how successfully and peacefully you will retire, and live comfortably thereafter.

    It is imprudent to determine the amount you need during retirement and forget about it completely.

    It is important to set the ball rolling by:

    Allocating a certain portion of your income towards retirement; and

    Invest regularly, but prudently in wealth creating investment avenues based on your risk profile and the investment horizon you have.

  2. Inadequate Savings:

    Money saved is money earned! Saving for your retirement is absolutely vital!

    Amid all the materialism today, you ought to make the right choices - whether you want to buy a luxury car, high-end gadgets, or live a comfortable retired life in a modest house in a peaceful neighbourhood. This can help you add the extra savings for your retirement.

    The irony is most people tend to meet their current desires by sacrificing their future goals. Prudent planning for retirement is not only about where to spend, but when to spend. Remember, delayed gratification can help you compound money for your retirement.

    Saving alone can't help you live a comfortable retired life. You need to invest in productive investment avenues. So, start as early as possible by allocating maximum amount towards your retirement. If you're young, start a SIP in equity mutual funds, besides contributing a small portion to PPF, EPF, and NPS, amongst host of investment products. Remember, there is "no one size that fits all" approach.

  3. Procrastinating your retirement plans:

    Well, this spells a disaster and often brings discomfort during retirement.

    If you're young, with time on your side and earning potential, you can afford to tilt your investment portfolio more towards risk assets such as equity, than being conservative. This can result in better compounding for your retirement.

    You see, responsibilities increase as you age, and the risk appetite reduces. So, the earlier you start the better it is.

    Remember, the early bird gets a bigger pie.

    Every small step in the right direction can help you live a comfortable retired life.

    The Early Birds Gets The Bigger Pie

    Current Age

    20 25 30 35 40 45 50 55

    Retirement Age

    60 60 60 60 60 60 60 60

    Years left to retire

    40 35 30 25 20 15 10 5

    Return (CAGR)

    12% 12% 12% 12% 12% 12% 12% 12%

    Amount saved per annum

    25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000

    Retirement Corpus (Rs)

    1,91,77,286 1,07,91,587 60,33,317 33,33,347 18,01,311 9,31,993 4,38,718 1,58,821

    Corpus Differential (Rs)

    - 83,85,699 1,31,43,969 1,58,43,939 1,73,75,975 1,82,45,293 1,87,38,568 1,90,18,465
    (Note: The table is for illustration purpose only)
    (Source: PersonalFN Research)

    Although you may be well-to-do, the future is uncertain. You may have noticed that cost of living has gone up considerably over the years and the value of money has reduced. This is because the inflation bug eats into the value of money. Also, God forbid if you go through financial crisis it could impact your idea of blissful retirement.

    Procrastinating to plan for retirement is the biggest enemy. In fact, starting early and ensuring that you have sufficient time on your side is the key to a blissful retired life. Being young provides you a benefit that is not available to all, 'time' (which can enable better compounding of wealth if invested wisely). Make hay while the sun shines, it will help you live through the winter years. You must understand that retirement planning is the only key to remain financially secured and maintain a comfortable standard of living even in the later years of life, where you may not draw regular flow of income. You see, planning for retirement early can keep you financially independent even during your golden years, taking care of day-to-day expenses, medical emergencies (that may arise as age progresses), and even enjoy a decent lifestyle during retirement.

  4. Relying heavily on Government sponsored retirement plans:

    A common myth we financial planners tackle on daily basis is: Government backed retirement plans viz. EPF and PPF can guarantee a peaceful retirement.

    The fact remains that in the recent years, with interest rates sliding, EPF and PPF are offering lower rates (since they are linked to benchmark G-Sec yield rates). And if the benchmark G-Sec yields drop, rates would slip even further.

    We believe that while they may be good for your retirement portfolio, being heavily dependent on Government backed small savings schemes by allocating a sizeable portion of your savings, may not be prudent approach.

    In the early stages of your working life, allocate more towards equity than debt. You see, equities have the potential to grow your wealth better by clocking an appealing rate of return - history proves that. Therefore, have a right mix of equity, debt, and gold in your portfolio depending upon your age and years left to retire.

  5. Not providing for rising medical needs during retirement:

    "....he never saved money or invested in mediclaim facilities and that's why he went through financial crunch," said Mr Vijay Hangal, on the demise of his father, the legendary Mr AK Hangal (best known for his "Rahim Chacha" role in the iconic movie "Sholay").

    Before you decide that a family floater mediclaim policy with coverage of Rs 3 lakhs would suffice a family of four, make sure you consider the cost of rising health care.

    According to the Cross National survey on health conducted by National Sample Survey Office (NSSO), the cost of treatment outpaced by growth in double digits in the first half of 2014.

    It's frightful and can drain out one's personal finances, especially in case of serious ailments, in the absence of optimal mediclaim coverage.

    An underinsured individual may have no alternative but dip into his retirement savings during medical emergencies, and in the bargain that would derail the objective of a blissful retirement.

    So, ideally ensure that you, as well as every member of your family, have a mediclaim insurance cover of at least Rs 5 lakh. You may add a 'super top-up' plan if you need more insurance coverage.

    Don't risk your retirement by not having optimal health insurance; it would be "penny wise and pound foolish"!

  6. Excessive withdrawals:

    We have been privy to individuals who exceedingly withdraw from their retirement corpus. The withdrawal rate at times, even touches as high as 20% per year especially during the early phase of retirement. This ends up depleting the corpus quite quickly and is a grave mistake.

    Ideally, the withdrawal rate should not be more than 4% per year of the retirement corpus.

    You see, a higher withdrawal rate can only derail your objective of comfortable retirement. And with rising inflation eroding the purchasing power of your hard-earned money, the damage can be even more.

  7. Retiring with debt:

    A debt overhang can never allow you to lead a blissful retired life, and is not in the long-term interest of your family either. With other expenses to meet, it's best not live with EMIs. The worst among all debts is the credit card debt, which comes along with a steep interest rate.

    Most individuals end up replacing their SIP with EMIs of the loans; but this can spell a disaster for your retirement. We strongly advocate retiring debt free. It is of utmost importance to retire peacefully.

    Finally, here are a few...

Points to Remember

  • The key to a successful retirement is to start planning prudently the very first time; because there might not be a second chance before you reach retirement.

  • A financial plan is the most important document, and its effective implementation can lead to long-term financial wellbeing.

  • How well you've planned for your retirement would decide how peacefully and successfully you'll retire.

  • It is important to continuously monitor the retirement portfolio and make necessary changes whenever required

  • Avoid procrastinating. Start planning for your retirement early.

  • Invest in wealth creating investment avenues to build your retirement portfolio, whereby you counter inflation.

  • Ensure you have an optimal health insurance coverage, to avoid draining your retirement portfolio.

  • Make sure you don't withdraw more than 4% of the retirement corpus every year. It can seriously derail your retirement plan.

  • Live a debt-free retired life. You don't want to spend your retirement worrying about the next EMI payment, do you?

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