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Wednesday, June 26, 2013

Mistakes of Retirement Planning

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Retirement planning is a meticulous exercise. It needs to be managed with dexterity and mistakes can be very costly. Hence, it is important to avoid some of the common mistakes in such planning. Here are four such known mistakes that people often make.

 

1. Buying retirement plans for retirement planning can be suicidal:

 

People often say what's in a name. In the context of financial planning, name does matter. There is a child plan, retirement plan etc. for their respective uses.

 

If you ever thought, retirement plans sold by financial institutions and mutual funds are best solutions for you, it is time to wait and ponder.

 

There is a likelihood that you will mess up your retirement planning goals by buying these products. Most of these plans offered by insurance companies are in form of unit linked insurance plans (ULIPs). Some plans barely offer even decent returns.

 

As far as mutual funds are concerned, any scheme with retirement plan makes no sense. You may probably find a higher exit load for those schemes which are meant for retirement planning. There is no substantial product differentiation.

 

It is important for an individual is to focus on building a corpus. This may include investing in equity and quality bonds along with other investment options.

 

2. Misinterpretation of inflation:

 

Inflation makes a significant impact on retirement planning. It is important you watch out for how inflation impacts your life. Don't look at the wholesale price index (WPI) or consumer price index (CPI) number. None of them reflect inflation number for you.

 

While government may play with these numbers for policy-making for a common man, these numbers do not mean much except for giving a directional call.

 

This means that an upward moving CPI number gives an idea about rising inflation. Make your own expense chart and see how inflation impacts you.

 

It is possible that inflation number shown by the government is 5 percent, while your expenses adjusted with inflation have gone up substantially, without adding of any new type of expenses.

 

Your retirement corpus increase should get aligned to the inflation number observed by you and not any other government published numbers.

 

3. Frequent churning of portfolio meant for retirement:

 

Retirement planning is a long term strategy. However, very often people get influenced by events in the financial markets, especially with respect to the volatility in the variable income products like equity and mutual funds.

 

While it is difficult to stay invested when returns are turning negative, the need is to stay invested.

 

Also regular investing makes sense even during the time when things don't look so hunky dory. Make higher investments in initial years of retirement planning to ensure that you get benefit of power of compounding.

 

If there is a need to withdraw money from retirement corpus, you can withdraw. But, ideally, never touch your retirement corpus and never use it for anybody.

 

4. Never overestimate returns:

 

It is better to start with a conservative estimate of returns. People generally start with an assumption of high returns in equity and equity mutual funds while practically returns may be lower.

 

As a result of this estimation in error, the requirement of investment for creation of a specific corpus may get derailed.

 

So it is better to start with a conservative estimate of returns and higher allocation of savings for investments for retirement planning

Happy Investing!!

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