Sebanti Roy Chowdhury

How to Prevent 5 Common Retirement Planning Mistakes Do you know, what are the five stages of retirement? It consists of looking forward to the end of working years, the liberating feeling after retirement, disenchantment once retirement bucket-lists are complete, rediscovering your identity, and finally settling into a rewarding retired lifestyle. But to reach the fulfilling final stage, you need to overcome the phases when you face a loss of purpose. However, if you have to compromise with your lifestyle to avoid outliving your retirement funds, getting out of the disenchantment phase can be challenging. A sound financial plan starting from the pre-retirement phase can ensure financial freedom post retirement. But you must avoid some common mistakes to prevent cash-crunches from interfering with a peaceful retired life. What should you not do in retirement planning? 1. Underestimating retirement-savings requirements Knowing how much you need to maintain your current living standards after retirement can help you avoid cutting costs later. Take the following factors into consideration when you plan for retirement: Life expectancy: Progress in healthcare makes active life well into your 80s or 90s possible. Thus, you need enough to cover your living costs for decades after your salary stops. Inflation: The average inflation rate from 2012 to 2020 has been 6.07% [1]. At this rate, the price of items that cost Rs. 1000 today will rise to Rs. 3249.76 twenty years down the line [2]. Hence, you need to factor in inflation rates to estimate retirement needs accurately.   Taxes: Consider the tax you will need to pay on your retirement income to know how much you should save. Look for pension plans providing tax-exempt returns. Medical expenses: Age-related health issues or unexpected medical emergencies can erode your economic security if you have to spend on healthcare out-of-pocket. 2. Not starting to plan early enough The power of compounding attracts interest on the returns your principal earns, increasing your capital. Thus, by starting early, your money gets long enough to grow, helping you earn more profits. 3. Trading retirement funds for other life goals Borrowing or partially withdrawing from your retirement account reduces investment growth. You can invest in separate financial instruments for your children’s college funds, home purchase, or other life goals. But you must ear-mark at least one investment plan for your retirement and let it accumulate uninterrupted to earn good profits. 4. Not preparing for unforeseen expenses Financial emergencies can force you to cash out your retirement funds. Hence you must always keep a fund containing at least six months’ income aside for contingencies. It can help you tide over life’s uncertainties without denting your retirement savings. 5. Selecting the wrong investment options Your investment plans must match your financial goals, risk-taking capacity, and investment horizon. Many investment options involve high brokerage fees, lowering your profits. If you are nearing retirement, you may not have the time to recover from market volatilities if you put your capital in equities. Also, for a financially secure retirement, rate of return from your pension plans must match your post-retirement monthly income needs. Hence, you must understand the features of all retirement plans available before making a final commitment. Work-related pension schemes Your employer sets up this type of pension plans to help you save for retirement. Different types of employer retirement plans include: Employees Provident Fund (EPF), offering pre-specified interest rates National Pension Scheme (NPS), providing opportunities for market-linked returns Gratuity, where the amount you get depends on your years of service and salary Life-insurance based group pension schemes providing life cover along with gratuity/ annuity    In both EPF and NPS, your employer and you both have to contribute a defined percentage of your monthly salary. The average rate of return on 401K-like EPF schemes is often conservative. In NPS, the returns are based on the performance of your chosen funds. Also, you have to purchase an annuity, or a monthly-income plan, with at least 40% of your NPS maturity amount. Even if you participate in a pension plan at work, it is advisable to opt for an individual retirement scheme as a back-up. Individual retirement plans Public Provident Fund (PPF) National Savings Certificate (NSC) Senior Citizen’s Savings Scheme (SCSS) Monthly Income Scheme (MIS) from post offices Annuity plans from life insurance companies Unit-linked or traditional retirement plans from life insurance providers An annuity plan offers a lifelong income stream. It effectively shields you against any shortage of funds in your advanced age. Some annuity plans provide a return of purchase price, which can secure your dependents’ financial wellbeing in your absence. Life insurance pension plans safeguard your loved ones against any financial shortfall if your pension stops due to an unfortunate event. The returns are also tax-exempt subject to the conditions under Section 10(10D) of the Income Tax Act, 1961. Also, with guaranteed returns from traditional policies, you can be sure of financial resources after you stop receiving paycheques. The market-linked products help you tap into the capital market’s high return potential, offering inflation-adjusted returns. Moreover, you can claim deductions from your taxable income for the premiums you pay to purchase an annuity or a life insurance retirement plan. Hence, you should consider including such products in your retirement portfolio to avoid financial uncertainties during retirement. TATA AIA offers a wide range of retirement solutions to secure your financial stability after retirement. The different types of employer retirement plans TATA AIA offers include:        Group Employee Benefit Plan (UIN:110L151V02) Gratuity/ leave encashment benefits for employees Smart Annuity group annuity plan (UIN:110N150V05) Options for immediate start of income or delaying pension as per need Alternatives to get purchase price refund and joint annuity for financial dependent Individual retirement plans from TATA AIA and the benefits they offer include: Smart Annuity individual annuity plan (UIN:110N150V05) Choice of an immediate or deferred annuity Provision for return of purchase price Guaranteed Monthly Income Plan (UIN:110N147V02) Assured income for double the policy term Additional rewards on large premiums to increase your income Compare different offerings and select a plan based on your budget and future financial needs. It will protect your old age from financial worries. Resources: 1. https://tradingeconomics.com/india/inflation-cpi#:~:text=Inflation%20Rate%20in%20India%20averaged,percent%20in%20June%20of%202017. 2. https://www.calculator.net/inflation-calculator.html?cstartingamount3=3249.76&cinrate3=6.07&cinyear3=20&calctype=3&x=116&y=32#backward https://www.policybazaar.com/life-insurance/pension-plans/articles/5-retirement-planning-mistakes-you-should-avoid/ https://www.policybazaar.com/life-insurance/pension-plans/articles/different-types-of-retirement-plans/ https://www.wildpineresidence.ca/the-5-stages-of-retirement-everyone-will-go-through/ https://www.investopedia.com/articles/retirement/07/sixstages.asp https://indianmoney.com/articles/types-of-retirement-plans https://www.wellsfargoadvisors.com/planning/goals/retirement/mistakes-to-avoid.htm https://www.plannersearch.org/financial-planning/5-common-retirement-planning-mistakes-and-how-to-fix-them https://www.maxlifeinsurance.com/blog/retirement-planning/five-retirement-planning-mistakes https://www.principalretirementindia.com/retirement-planning-articles/5-retirement-planning-mistakes-to-avoid.aspx https://www.policybazaar.com/life-insurance/pension-plans/articles/5-mistakes-you-must-avoid-while-planning-retirement/ https://www.cnbc.com/2020/09/28/6-retirement-planning-mistakes-to-avoid-when-you-are-in-your-60s-.html https://www.reddit.com/r/IndiaInvestments/comments/3j3v3h/is_there_anything_similar_to_the_401k_in_india/ https://www.indiainfoline.com/article/general-blog/what-is-401k-plan-and-how-does-it-work-_1.html#:~:text=Like%20the%20EPF%20contributions%20in,company)%20contribute%20to%20the%20plan.&text=In%20India%2C%20the%20employer%20contribution,employee%20contribution%20is%20tax%20free.