5 things that can ruin your Pension / Retirement Plans

After all the years of working, Retirement should be a time used to enjoy the pleasures of life!  Most people will have children who have grown up and started working; reducing the burden of having to provide for them. If one has saved well and has provided for retirement, it is an ideal time to enjoy the fruits of a lifetime of working.

Unfortunately, sometimes this is not so!  Bad financial decisions, wrong planning and a lack of understanding of risk and reward can sometimes put a Retired Persons pension nest-egg at risk.

Here are 5 things to keep in mind to avoid a post retirement financial trap

  1. Delay in starting a savings plan. Sadly, many a times, people have to keep on working well past retirement age simply because they have not saved enough to retire on. The fact is that there is a cost to postponement. That is to say, if one delay’s starting to save for retirement it can have a significant impact on the amount available on retirement – the amount one needs to save grows with each year of delay.

The earlier that you start to save for your retirement, the lower is the amount you need to save every year to meet your target. Put another way, if you start to save early, you will have a larger amount available because of the benefits of compounding.

See Pensions… Impact of Compounding

  1. Not taking advantage of available options. There are a number of options available to save for retirement, systematically. However, many people are either unaware of the options available or don’t take advantage of them. There are a number of tax advantages that can significantly benefit a long term saving plan – and you ignore the options at a cost.

The government offers tax advantages for pension fund savings – under the Public Provident Fund, the National Pension Scheme and for Life Insurance Companies Pensions Plans. Additionally, the Employee Provident Funds offers opportunities to save with a matching contribution from the Employer – with options for increasing the saving contribution through additional voluntary contributions.

All of these offer varying risk-reward options – and you must make a choice, based on your risk appetite and tolerance, between fixed interest and market linked options available.

Consider the options available and factor this in to makour plans. Don’t ignore the options available to make your savings grow.

See Impact of Income Tax ‘EEE’ schemes on savings (New DTC Draft)

  1. Investing in high risk or high yield investments without due care. One often reads about or hears of people who have ventured out to make large investments in high risk investments post retirement and have lost a significant amount causing financial ruin.

High income / yield investments tend to be volatile. Whilst they can lead to high returns, they can also give negative returns. One must take appropriate precautions with any advice to invest in high yield investments in your retirement years.

If you do not have any other means of stable income, the first priority has to be to ensure that your “core” investment is protected so that it provides you with the monthly income you need to maintain your lifestyle.  Any investment for higher gain, whether in property, equities or other, should ideally be done only once your basic pension income is provided for.

  1. Not planning for health care expenses. Two facts are key to remember. One, the cost of health care is increasing every year – at a fairly high rate. Two, cost of health care only increases with age.

It is quite often the case, especially in India, that people do not provide for health care. Our society has been structured on family dependence, and most people have traditionally not provided for sufficient health care through health insurance plans. However, society is changing and it is today a necessity that you have planned properly for your future health care expenses.

Not having sufficient cover can significantly impact on your savings available during retirement and cause financial ruin.

See Health Insurance… Wealth Protected

  1. Spending your retirement corpus too fast or too slow. The problem with retirement is that most people do not have other means of income – other than income generated from retirement savings. This can result in two very different “problems”

The fact is that with advances in medicines and improved living standards, average life span has been increasing significantly. Therefore, people tomorrow can expect to live longer in retirement – and have to make their retirement funds last that much longer. One needs to be careful about not spending too much of the retirement corpus too soon as this can lead to impoverished lifestyle in the later years.

Retirement should ideally be a time when you can enjoy the pleasures of life. Spending too little today and saving your retirement corpus for a later time is not what is desired. Proper planning and an early start to saving can ensure that you meet this objective and lead a happy and fulfilling retired life.