Even careful, dedicated savers don’t always have a strategy in place as far as their retirement planning goes. Many times, people just put money aside and hope it will work out.
We pinpoint three common pitfalls when it comes to saving and investing for retirement. These little missteps could put a deep crack in your nest egg.
Here’s what they are and how you might avoid them.
1) Underestimating life expectancy
Seriously, no one is really good at this. Estimating how long you are going to live is one of the thorniest issues in retirement planning. A grave error is underestimating how long you are going to live, which brings with it the reality of outliving your money – a fairly ghastly thought.
Think about it. You eat right, exercise regularly and conduct your regular health check-ups because you want to live longer and live healthy. While you should be commended for it, it could also be tricky if your planning does not take into account an adequate stream of income for these added years.
Chances are you will live a fairly long life. Here’s why.
According to the Sample Registration Survey (SRS) Based Life Table 2010-14 report, life expectancy has risen from 49.7 in 1970-75 to 67.9 in 2010-14, registering an increase of 18.2 years in the last four decades. (Source: Deccan Herald)
Life expectancy has more than doubled between 1947 and 2011 from 31 years to 65 years. (Source: Eureka Street)
According to the WHO’s World Statistics Report 2016: In 1990, Indians were expected to live on an average till 58 years. This rose to 66 years in 2013. In 2015, life expectancy at birth was 68.3 years. (Source: First Post)
Statistics released by India's Union Ministry of Health and Family Welfare in 2014 showed that life expectancy in India has gone up by five years, from 62.3 years for males and 63.9 years for females in 2001-2005 to 67.3 years and 69.6 years respectively in 2011-2015. (Source: Times of India)
Before you start your calculations, take note of the term 'average'. There is a significant life expectancy gap between the affluent and deprived communities. If you are in reasonably good health, have access to good medical facilities and healthy nutritious food, and not suffering from chronic or acute diseases, you could live well into your eighth decade, way higher than the average. Look at your family history. See how long your parents lived.
According to certain studies, by 2050, the number of Indians above the age of 65 will cross 200 million from about 80 million currently, while the number of Indians above 80 years of age will be at 43 million, second only to China.
Err on the side of caution. Plan for chances of survival for at least a decade or so post retirement.
2) Cheating on your retirement savings kitty
There are many ways you can do this.
The first is by dipping into it to meet other goals. Often individuals use their retirement savings fund to pay for their child’s education or, worse still, the child’s wedding. This is a dangerous move because it could result in you not having sufficient funds when you retire. Being old, unemployable and broke is a very scary scenario. Your children can take loans for higher education or weddings, but you will not get a loan to tide you over in old age.
Another way you are cheating is by not increasing your retirement contribution as and when you get a salary increment. You are saving for retirement so you can live a similar lifestyle to the one you have currently. If you keep your savings proportionate to the salary you had as a 25-year-old, you cannot expect to support a better lifestyle in retirement. When your income increases, so should the amount you save. The way to do this is not to get stuck on an amount, but go by a percentage. So if you are saving 15% of your income for retirement, stick to that percentage as your salary increases. The actual amount will automatically go up. Remember, when saving for retirement, it is very difficult to make up for lost time.
3) Investing too little in stocks
The current 15-year average annualized fund return from the large-cap category (19.50%), mid- and small-cap category (21.74%) and flexi-cap category (21.95%) shows that over the long run, equity does deliver higher than other asset classes. Also, over a holding period of more than 12 months with regards to equity, long-term capital gains is nil. So that is a tax-free return.
You won’t get such a return from a fixed-income instrument. And you will have to pay tax on the interest earned.
When planning for retirement, individuals tend to be ultra conservative and put their money in fixed deposits and bonds. All in an attempt to avoid the volatility of equity. What they do not realise is that they would end up dealing with shortfall risk.
Investors can fall short of their financial goals for many reasons--key among them is under saving. But if you're saving for a long-term goal, holding too much in investments with little to no short-term volatility--but commensurately low returns—will contribute to the shortfall risk.
If you are avoiding equity on the premise that it is more volatile and hence more risky, you are not seeing the whole board, to borrow an analogy from chess. We tackled this issue in 3 habits stopping you from becoming rich. Don’t shy away from maintaining an equity exposure in your portfolio. If you choose to do so, you could be jeopardising your entire financial plan.
Do consider equity funds and invest in them systematically.
Our final word of advice: Do consider talking to a financial adviser who will be able to give objectively guide you in your savings plan.
