Retirement Mistakes.

Retirement, purportedly is the most important goal for most of the readers of this column. At least that is what most of the mails that I get say. Yet, looking at the numbers, it is clear that many investors are undermining their good intentions with unfortunate actions. Or inactions should I say? All their good intentions mean nothing if there is no action. Here are ten mistakes to avoid if you want your retirement dreams to become a reality.

1. Consuming you retirement corpus much before retirement: A study by OASIS found that most employees cash in their provident fund when they switch jobs. Most of them withdraw the money for various reasons like marriage, festivals, consumption, etc. In other words, they take the money — rather than leave it in a retirement account. That’s no way to build the retirement of your dreams. If the amount in your provident fund at retirement is Rs. 24,000 (Oasis report), I seriously wonder how long you wish to be in retirement? 30 days? This amount will perhaps be enough only until you reach your retirement destination – say from New Delhi to Trivandrum. After that, what?

When you change jobs, you can transfer the money in your employer-provident fund to a government run scheme that will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans’ rules. If you are self-employed, there are mutual funds and life insurance companies, which will have nice schemes in which to accumulate this amount.

2. Postponing / Procrastination:  Cashing in your provident fund at a young age is not the only way for your retirement fund to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be painful. Of course, no one wants to be told to “save” — it is so boring and perhaps not gratifying at all. It is all about choices – if you choose pain now, pleasure will come later on. If you choose pleasure now, pain will follow!

This is what low-savers (and non-savers) are really doing: They are spending their retirement now — which may mean they will not be able to retire at all. Buy that Plasma TV now, or buy time in retirement tomorrow. Take a cruise this year, or take time off several years from now. Those are the choices you have to make. Building a nest egg is not a decision of whether to consume, but when to consume. Do it now and you will not be able to do it later without having to work for a salary. Translate all your needs into “number of day’s effort” and you will realize the real cost. If that dream house is Rs. 72, 53, 000, and your take home pay is 8, 00,000, it means 9 years of your life is for your shelter on a gross basis. On a net basis (i.e. the savings per year, it is perhaps 18 years effort). How to arrive at the cost of the house? Just multiply your EMIs with the number of installments. You might surprise yourself in how expensive your house is!

3. Having no clue about how much to save/ invest. According to a survey by a newspaper, many employees have not calculated how much they need to retire. However, you cannot get to where you want to go if you do not know how to get there. You will find interesting calculators, which might show you a financial mirror. If you do not like what you see, instead of logging out do something about it! Check google for such calculators or look at the websites of mutual funds, life insurance companies and independent websites like myiris.com, moneycontrol.com, etc. 

4. Spending your retirement savings too fast. If you have made it to retirement, congrats! You have done the first part. Now check how much you have. Nevertheless, you cannot take it too easy. Because you will receive, a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you will not outlive your savings? Just 6% a year. That is the withdrawal rate that would have sustained a mix of shares and bonds over most 30-year historical periods. Sure, if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 6% a year could have your portfolio beating you to the grave. Of course, if you have been in the markets for the past 4 years only, you might laugh at this figure, but please get realistic. The corpus has to feed you, clothe you, cure you, protect you and keep you in your shelter while keeping pace with inflation.

5. Asset allocation! What is that?  Almost all the people I meet let too much money lie in their savings bank account. Too many young people keep too much money in debt instruments like nsc, ppf, endowment policies, etc. Nothing can kill a retirement like bad investment decisions, whether it’s owning too much of one share, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy. Or being too lazy to move money from a savings account to an investment account.

You basically have two choices: You can be a master share-picker like Warren Buffett or Peter Lynch or Vallabh Bhansali and try to find the next Wipro, or decide whether a dividend yield makes a company a good share. Or you can broadly diversify your assets, mostly via low-cost index fund. Or look for good mutual funds or unit-linked policies. This way, you enjoy exposure to shares like ITC and SBI — and smaller growth firms such as Gillette and Kotak Bank. But until you have established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio.

6. Letting the taxman eat your investment. There are many types of investments and investment accounts, and they all have their own quirks when it comes to taxes. Not knowing all the rules can lead to too much taxation — and less money for retirement.

Profits from shares or mutual funds that are held for at least a year will be taxed as long-term capital gains — a rate currently NIL. Interest from bank deposits, on the other hand, is taxed as ordinary income — a rate as high as 35%. Yet investors keep their moneys in bank fixed deposits, RBI bonds, nsc, etc. That just does not make sense. Asset location can be just as important as asset allocation. Even if you wish to have liquidity for some portion of your money, you are better off in an income fund, FMP, or a floater fund rather than a bank FD or RBI bond.

7. Not looking after your health – physical and financial! Every time you eat out check, whether you are putting enough money into your retirement investment accounts. If you eat out today, you will eat out 30 years hence, and ensure that you have enough money to do that. Every time you eat, promise to take it off the next day at the gym. Remember, as you get older, you will eat out, go to the gym, go to the doctor, etc.  8. Paying too much for help. There is nothing wrong with getting financial advice. But every time you wondered who was paying the bills for your adviser, fund manager, banker to make those foreign junkets and drive those long cars; remember it is you. Many mutual funds, insurance plans, pms schemes and other collective investment schemes have not reduced their fees inspite of their assets growing at a fantastic pace. Paying too much for advice (especially if it is bad or conflicted) does a lot for your broker’s retirement, not yours. Paying just 1%, a year on a Rs.1,000,000 portfolio over 20 years could result in your forking over more than a MILLION RUPEES in fees. That’s a MILLION RUPEES that could have been in your retirement plan. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. But if you are paying 2% or 3%, a year to lose to an index fund — as most mutual fund managers did last year — then you’re better off taking control of your own investments. Or shifting to a simple, low cost, low tracking error index fund.

9. Retiring when you needed a break. If you are in your 50s, you should plan to live at least another three decades. Can you stand full-time leisure for 30 years? Sure, it may sound good now, but many retirees find they get pretty bored after a while. Look around in your family to see how long you will live. If your dad, mom, uncles, aunts,  are all traveling around in their 80s, and living in their 90s, so will you! Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and/or business partners. Explore your options before you no longer have them

10. Hoping that your kids will take care of you: Not that they will not. Maybe they cannot. Do you expect your recently bereaved 64-year-old son to take care of you? What about your daughter who wants to spend 4 months with her daughter in the US of A? It is a physical impossibility for many Indians who now lie scattered around the world. A day care centre is a reality. So go and provide for day care too!