6 Common Money Mistakes During Retirement Years4 min read
A happy and stress free retirement is the ultimate sign of a successful financial and retirement planning. There are a few mistakes that people make during retirement years. These mistakes should be identified and avoided. Some of them are listed below:-
1] Over Allocation to Fixed Deposits –
While financial security is a big focus on retirement, getting out of the market isn’t a safe bet either. People, because they focus on not losing money, forget the risk of outliving your money, inflation risk, credit risk, so they put themselves at risk in every category except losing money. Retirees put money in fixed deposits that earn a low rate of return.
Be realistic about how long your money will be invested. At age 65, your life expectancy is, on average, another 20 years, but if you make it to 85, then you’ve still got another 6-7 years of expenses left to cover. So, don’t worry about losing your money over the next six months, but instead ask yourself how you can make it last another 25-30 years. It may make sense for you to separate your assets into different pools, and invest a little aggressively.
The average FD returns below are pre-tax returns. These returns would go down after tax depending upon your tax slab.
2] Almost Zero Allocation to Equity Asset Class –
Many retirees’ are overly cautious because they don’t have a lot of money and are afraid of losing it. Without an appropriate level of exposure to equity, you will likely need to save far more money to reach your long-term goals, leaving less room in your budget for anything else you want to accomplish.
Holding a certain amount of equity could potentially boost returns for that level of risk. Ideally, you should bring down the equity component of your investment to protect the corpus and reduce risk as you approach retirement. However, it is equally important to invest a certain portion in equity. If you are too much conservative, then it will lead to losing the value of your money.
3] Underestimating Inflation Impact –
When it comes to financial planning, people usually ignore two things- the current time value of money and how money loses its value over the time. While we are focusing on increasing income with time, it is also essential to pay attention to the rise in expenses and drop in the value of money because of overall annual increase in prices of common goods and services behind the same.
Ignore inflation rate and you will notice that your savings gradually erode away while your monetary plans go haywire. Inflation is one of the most critical factors that can disturb your retirement plans. It is essential to factor in inflation into your retirement planning program. Also, realistic projections of future inflation rates are critical to building a strong retirement corpus.
For example, if a person needs Rs. 30,000 for monthly expenses right now, and considering 7% inflation, then after 25 years that persons’ monthly expenses would reach around Rs 1,60,000.
4] Buying Retirement Plans from Insurance Companies –
Insurance companies were not designed to fund retirement or provide retirement plans. Insurance companies were never meant to be an investment vehicle, and it’s certainly not the best way for retirement planning. While insurance companies make it possible to fund your retirement, there are risks involved as well as huge fees to consider.
So if not a retirement plans from insurance companies, then what?
If one is in your 30’s or 40’s, and has more than 20 years to go for retirement, invest the retirement investments into a mix of asset classes, that is equity, debt and maybe gold.
If one is nearing retirement, i.e. one is already in 50’s and have less than 10 years to retire, invest up to majorly into debt such as debt mutual funds and high yielding but safe corporate bonds, keep small portion into equity to make the portfolio a little aggressive, and the remaining maybe in gold.
5] Depending on Children for Retirement Needs –
No matter how well you think you know your children, money can make them unrecognizable in an instant. For that reason, it’s never safe to assume your children will be the same generous, giving types that they are today.
Your children may be unable to support you even if they want to. Handling your finances allows more privacy. You don’t want to be a burden to your children. You know your retirement needs better than your own children.