Poor saving habits and bad Investment decisions can derail your retirement planning. This is obvious from the following examples ; –
Selecting Wrong Investment Vehicles : –
Mr Gabriel, 45 years, started saving early, saved regularly and never dipped into his retirement kitty. Yet, when he took stock of his retirement savings later on, the corpus was far smaller than what he had expected. “ I focussed entirely on risk-free investment options such as Bank Certificate of Deposit(C.D.) and Bonds”, says the self-employed professional.
His Mistake : – Started saving for retirement quite early, but played too safe. After almost 15 years of investing in Bank C.Ds. and Bonds etc., he realized he will not reach the goal.
How He Fixed It : – Two years ago, he started shifting his savings from fixed deposits (C.Ds.) to equity funds. He currently has 60 percent allocated to equities.
Investing In Stocks Without Thorough Study : –
In Pennsylvania, Mr. Thomas, a working individual is ruing the day he took a friend’s advice and gave his retirement portfolio a dash of equities. Though experts recommend this, Mr. Thomas made a fundamental mistake when he went shopping directly for the equities. A newbie, he invested in stocks directly, and that too, when retirement was just a few years away(He was about 60 years of age). Though the overall market was booming in 2014, but he lost around 12 percent of his investment in one month.
Mr. Gabriel and Mr. Thomas represent the two extremes of the risk spectrum. One took too little risk with his retirement savings and lost the opportunity to build a large corpus. The other took too much risk and saw his wealth erode.
Experts warn that equity investments should not be done with a short- term horizon. “ It is harakiri to invest in stocks directly to make up for the shortfall in retirement corpus”. At the same time, relying too much on fixed income options for the long-term can also be risky. In the long-term, investments in the fixed income products are just as risky as equity investment are in the short-term”.
Common Investment Mistakes People Make : –
Most of us, make some common investing mistakes that can ruin the retirement plans of an individual. The reasons can be many like lack of knowledge; too much dependence on others advice ;selection of improper financial goals or not considering the effect of Inflation while calculating the amount required for retirement life.
Some of these mistakes , as mentioned above, can be fixed like Mr Gabriel’s over-dependence on fixed income products. He realised his mistake in time and was able to effect a course correction. However, some mistakes , like Mr Thomas ill- advised foray into equities a few years before retirement, cannot be undone”. It was a terrible mistake. I will just have to live with the consequences”, said Mr. Thomas.
His Mistake : – Invested $16,000 in stocks for high returns a few years before retirement and lost a handsome amount within a month.
Can he Fix It : – Small investors with no knowledge of stocks should avoid direct investments. The Mutual Fund route is a safer and better option.
Don’t Commit Harakiri : –
Stocks are inherently volatile but some experts contend that they are necessary if you are investing for long-term goals. “ Long-term investments must be kept in equity backed investments , if you do not want to expose yourself to old-age poverty”. Investors can also insulate themselves against big losses by taking the mutual fund route. Given the Diversification followed by mutual funds , the chances of loss reduce further. Studies show that the probability of loss in equity-based investments decreases as the investment tenure increases. Chances of loss is highest if you hold an equity fund for one year, but come down dramatically if the holding period is longer than five years. If held for 10 or more years, the probability is almost Nil.
Some experts suggest investment through systematic investment plan, say monthly or quarterly instalment plans, in equity oriented funds. However, expectations should be set straight. “ The investor would be disappointed if he expects unrealistic returns over a 3 to 4 years investment period”.
The Risk In Insurance Plans For Investment : –
Many investors consider various insurance policies/ plans, an ideal way to save for retirement because of the multiple benefits they offer. These policies enforce a saving discipline, offer tax deduction on the premiums, cover the life of the individual and maturity proceeds are tax-free. But these policies are not very helpful for money growth as the returns are very less even if you go for a long-term plan.
Going Wrong With Estimates : –
Saving regularly and in the right instruments will not safeguard your retirement if you do not estimate correctly how much you will need in your sunset years. Many of us fail to factor in the adverse effect of Inflation while calculating their retirement kitty. Inflation has the power of compounding . If you have not taken inflation into account, be ready to live a life that will be substantially poorer than how you live now. Keep in mind the impact of lifestyle inflation on your retirement needs, as the standard of living improves over time.
Another misconception is that the expenses will reduce in retirement years, which is not a fact. Although you may not have to spend on children’s education and all your loans may be paid for, but your travel and healthcare expenses usually increase after retirement.
Putting Retirement Corpus In 1-2 Income Products: –
Even if you saved enough, you can still sabotage your retirement by putting all your eggs in one basket. Experts say your retirement tool kit should be a mix of various products. For instance, it is not a good idea to put a large sum into an annuity plan. Though annuities assure life-long pension and are an insurance against the threat of outliving your money, they also offer low returns that won’t be able to beat inflation in the long-run. Further, Annuity has poor liquidity too. Experts suggest a diversified income portfolio to optimally meet your retirement needs.
CONCLUSION : –
Saving for your RETIREMENT is possibly one of the most important financial goals. You need to invest in a good mix of financial products to make sure that you accumulate enough to live a comfortable life after you retire. Your job of investing should not end once you retire, you need to have a good mix of investment products even while living-in retirement. While selecting the right products for investment, consider the effect of taxation on your returns.