Do you know that retirement funds will need to outperform inflation and grow at a quicker rate. Even a nominal inflation rate of 6% over 20 years will diminish the worth of Rs 1 crore to Rs 29 lakh. Hence it is very essential to burst the common retirement myths and understand the facts.
Various people have different ideas about what retirement entails. Although governments and private sector organizations set retirement ages, the age of retirement is becoming more ambiguous in today’s gig economy. The age of retirement is determined by one’s competence and the demand for one’s knowledge.
As a result, if you have in-demand skill sets and want to work (given your health permits), you may. On the other side, even if you are in good health, you have the option of not working. In that instance, a retirement plan may be necessary. However, despite so much advancement and the availability of chances, it is not realistic for most individuals to work past a certain age. The average lifetime has grown in tandem with advances in healthcare.
With rising nuclear families and migration to metropolitan and worldwide settings, most older persons find themselves stuck alone in their hometowns, forced to care for themselves. According to the research, about 56 percent of the working population lives pay-cheque to pay-cheque, putting their future at danger. As a result, most older persons wind up tolerating rather than enjoying retirement. This can be prevented if individuals do not become enamored with some popular rumor concerning retirement.
Learn how to overcome the most common retirement myths and erroneous assumptions that might lead to an insecure retirement with insufficient finances.
Table of Contents
Retirement Myths And The Facts About Them
‘When I Retire, I’ll Spend Less Money.’
This is one of the most common retirement myths, most people believe in. Lets find out the fact about it.
FACT: No, you cannot. You are likely to spend more money in the first few years following retirement, if at all. While the general guideline is that you will need 70-80% of your pre-retirement income to sustain your lifestyle, most individuals indulge on travel, hobbies, and other passions that they put on hold during their working years.
Furthermore, even if you will spend less on commuting, children’s schooling, and loan EMIs, your medical expenditures are likely to rise as you become older. Another crucial aspect that works against you is inflation, which diminishes the value of your money and causes you to spend more for the same necessities. So, in order to guarantee that you are not left high and dry far into retirement, your nest egg must take into consideration all of these aspects.
‘My Health Insurance Will Cover My Medical Demands.’
FACT: If you had the health insurance you had in your 30s or 40s, it is unlikely to be enough for your later years for two reasons.
One, your health would have worsened, necessitating a larger cost, and two, medical inflation would have driven up the cost of treatment. If, on the other hand, you have not purchased any health insurance until retirement and have a medical issue, it is doubtful that any insurer will provide you one. Even if you do receive it, the premium will be outrageously expensive.
As a result, it is prudent to augment your insurance and establish a medical corpus by putting it in a readily accessible short-term debt fund. You should also raise the coverage over time and get a critical illness plan. Alternatively, if your children’s work offers it, consider enrolling in a business group plan, which not only gives cheaper insurance but also more coverage than an individual plan.
‘After I Retire, I Should Only Invest In Debt.’
FACT: At this point, the protection of your capital is vital, but so is the confidence that you will not outlive your savings. Life expectancy in India has increased over time, rising from 62.3 years for men and 63.9 years for females in 2001-5 to 67.3 years and 69.6 years in 2011-15, respectively. This suggests that you will live longer after retirement and must ensure that your kitty does not run out of funds in the middle. Furthermore, in order to maintain its buying power, the corpus must outperform inflation and so increase at a quicker rate. Even a nominal inflation rate of 6% over 20 years reduces the worth of Rs 1 crore to Rs 29 lakh.
Debt investing, with its 4-7 percent growth rate, will not help you attain this. You will need to expose your assets to equities in order for them to grow faster than your rate of withdrawal, at least in the first few years. You should be aware of how much you remove each year, which will be determined by three factors: asset allocation, time horizon, and returns. Higher returns will allow you to take a larger withdrawal and keep the corpus for a longer period of time. So go through your assets and allocate 10-30% of your assets to equity, depending on your demand for income supplementation.
‘My Provident Fund Will Look After My Nest Fund.’
FACT: No, it will not. When it comes to retirement savings, the PPF offers various benefits, including tax exemption on investment, interest, and withdrawal, a 15-year lock-in period, and capital safety. However, the corpus may not be sufficient to sustain you for the duration of your retirement. If you start investing Rs 10,000 per month for 25 years, a return of 8.7 percent implies you’ll have Rs 2.74 crore by the time you’re 60.
With an inflation rate of 8%, it may only last you 7.25 years into retirement (assuming your monthly needs are Rs 25,000 at 25 years and increase to Rs 3.42 lakh at 60), rather than 20-25 years. Similarly, EPF is a wonderful strategy to develop a nest egg since you are required to save consistently when you start working and it grows with your income. However, it will also fail to deliver a significant increase for your corpus.
As a result, while the Provident Fund can be an important part of your retirement savings, you will need to supplement it with investments in equities and mutual funds to help the assets grow and provide a safe retirement.
‘My Tax Liability Will Be Reduced Once I Retire.’
FACT: While it is possible that your income tax due could decrease or perhaps become nil because you will no longer be earning a regular wage, there is also a chance that it will grow or remain the same after retirement. This will be determined by your assets and other sources of income after retirement, such as rental income from property, pension, capital gains, dividend and interest income.
One of the primary reasons pensioners pay a high tax rate is that they invest the lump amount received upon retirement—Provident Fund or maturity from savings schemes—in tax-inefficient securities. As a result, it is critical that you manage your post-retirement investments in such a way that your tax outgo is minimized. This can be accomplished using a variety of instruments, including the PPF (with its exempt-exempt-exempt arrangement), equities and equity-oriented mutual funds (where capital gains are tax-free if invested for more than a year), and tax-free bonds. As a result, choose options that have no or little tax on yearly withdrawals or maturity.
‘Having A Home Is Plenty To Retire On.’
NO, it isn’t. While owning real estate is a national preoccupation in India and is associated with a secure retirement, you will need more than a house when you retire. Though having a roof over your head should be a priority, don’t forget that you’ll need an income in retirement to cover your everyday needs.
Even if you have a second home, the rent may not be enough to meet all of your demands, not to mention that it is not a liquid asset and may not help you reach your goals when you want to. So, unless you have a slew of properties that generate enough rental income to cover your day-to-day expenses, make sure you develop an asset allocation mix – stock, debt, gold, real estate – that provides liquidity and growth.
If you devote a significant percentage of your salary to a house loan EMI at the outset of your career, you will miss out on the opportunity cost and compounding power that may help you establish a sizable retirement corpus. Of course, in the event of a financial crisis, reverse mortgages can be used, but with most Indians wishing to leave their home as a legacy for their children, this is not a viable choice for many.
‘Children’s Aspirations And Career, Not My Retirement, Should Be My Focus.’
FACT: Most Indian parents are so preoccupied with their children’s demands that they willfully ignore their own, despite the fact that they no longer have pensions to fall back on. They begin by saving for their children’s education and marriages, and only afterwards do they consider retirement. If they do construct a kitty for themselves, they cheerfully tap into it to support other aspirations. However, it is time for a priority reversal. You should be concerned about accumulating a retirement fund for two reasons.
One, while your children may be able to find other ways to support their schooling, it is doubtful that you will discover a simple way to fund your retirement. They can use college loans, scholarships, and crowd-funding; you cannot. One positive side effect is that loan payback would help instill financial discipline and responsibility in children. Second, they will appreciate you not being a financial burden on them in later years when they have their own families to support. So, don’t rely on your children or other family members to fund your retirement.
‘I Can Retire Early’
FACT: You might be able to, but you might not. While many individuals fantasize about retiring in their late 40s or early 50s, it turns out to be a pipe dream. They plan an early retirement based on a random estimate of how much they would have saved by then, but they fail to account for two factors. They do not create a detailed assessment of the corpus needed to support them during their retirement years. Second, they don’t anticipate how much money they’ll need to attain their goals and pay off their debts and liabilities.
As a result, they are compelled to abandon their plans to retire when they realize they have not yet returned their house loan or that their daughter’s marriage requires finance. Worse, ten years into retirement, they may run out of money and be compelled to seek job that will be difficult to find.
Conclusion
So, if you are serious about retiring early, attempt to contact a financial adviser who can analyze your pre- and post-retirement financial demands systematically and propose an investment road map to get there. If you want to do it on your own, buy a retirement calculator before you start fantasizing about a hammock in the hills.
