Do you know, what are the five stages of retirement? It consists of looking forward to the end of working years, the liberating feeling after retirement, disenchantment once retirement bucket lists are complete, rediscovering your identity, and finally settling into a rewarding retired lifestyle.
But to reach the fulfilling final stage, you must overcome the phases when you face a loss of purpose. However, if you must compromise with your lifestyle to avoid outliving your retirement funds, getting out of the disenchantment phase can be challenging.
A sound financial plan starting from the pre-retirement phase can ensure financial freedom post-retirement. But you must avoid common mistakes to prevent cash crunches from interfering with a peaceful retired life.
What are the biggest retirement planning mistakes?
1. Underestimating retirement-savings requirements
Knowing how much you need to maintain your current living standards after retirement can help you avoid cutting costs later. Consider the following factors when you make future cash flow projections and plan for retirement:
- Life expectancy: Progress in healthcare makes active life well into your 80s or 90s possible. Thus, you need enough to cover your living costs for decades after your salary stops.
- Inflation: The average inflation rate from 2012 to 2020 has been 6.07%. At this rate, the price of items that cost ₹1000 today will rise to ₹3249.76 twenty years down the line. Hence, you must factor in inflation rates to accurately estimate retirement needs.
- Taxes@: Consider the tax you will need to pay on your retirement income to know how much you should save. Look for pension plans providing tax@-exempt returns.
- Medical expenses: Age-related health issues or unexpected medical emergencies can erode your economic security if you spend out-of-pocket healthcare.
2. Not starting to plan early enough
The power of compounding attracts interest on the returns your principal earns, increasing your capital. Thus, by starting early, your money gets long enough to grow, helping you earn more profits. Securing your family with life insurance is essential when you start planning your retirement. Therefore, your retirement plan must include a life insurance component to handle your family’s future financial needs in your absence. The life cover should be adequate enough to cover their daily needs, personal goals, the standard of living, and any emergency needs that may arise.
3. Trading retirement funds for other life goals
Borrowing or partially withdrawing from your retirement account reduces investment growth. You can invest in separate financial instruments for your children’s college funds, home purchases, or other life goals. But you must earmark at least one investment plan for your retirement and let it accumulate uninterrupted to earn good profits.
4. Not preparing for unforeseen expenses
Financial emergencies can force you to cash out your retirement funds. Hence you must always keep a fund containing at least six months’ income aside for contingencies. It can help you tide over life’s uncertainties without denting your retirement savings.
5. Selecting the wrong investment options
Your investment plans must match your future financial goals, risk-taking capacity, and investment horizon.
Many investment options involve high brokerage fees, lowering your profits. If you are nearing retirement, you may not have the time to recover from market volatility if you put your capital in equities. Also, for a financially secure retirement, the rate of return from your pension plans must match your post-retirement monthly income needs.
Hence, you must understand the features of all retirement plans available before making a final commitment.
How Can Life Insurance be a Part of Retirement Planning?
If you are planning to get a life insurance retirement plan, you will need to ensure that the policy coverage is enough for you and your family's needs. Since there is no fixed or regular income during your golden years, look for retirement investment options that can offer regular or monthly income. This should be adequate for your daily household expenses and should also enable you to save for any major upcoming financial commitments.
Life insurance plans can be useful when you are preparing for retirement, depending on the type of policy you have. Here are some ways life insurance can help you in retirement:
- Cash value accumulation: Certain types of life insurance policies, such as savings plans and guaranteed1 income plans, accumulate cash value over time. This cash value can be accessed during retirement to supplement your retirement income. The goal should be to save enough funds over the years until you retire.
- Tax@ advantages: Life insurance policies offer tax advantages on the policy premiums that can benefit you in retirement. While the cash value of a life insurance policy grows, you do not have to pay taxes on the funds until you withdraw it. And the premiums paid on the retirement can be claimed each year under Section 80C of the Income Tax Act.
- Legacy planning: With an early retirement plan, you can leave an adequate inheritance for your family in case of your demise. While the saved funds can fulfil your daily and emergency needs during your retirement, you can also make a provision to set aside some amount that can be passed on to your family as a legacy in the event of your death.
Life insurance can certainly offer additional income and benefits. However, along with a good life insurance plan that offers sufficient life insurance coverage, have a diversified retirement portfolio that includes other savings and investment vehicles.
Work-related pension schemes
Your employer sets up these types of pension plans to help you save for retirement. Different types of employer retirement plans include:
- Employees Provident Fund (EPF), offering pre-specified interest rates
- National Pension Scheme (NPS), providing opportunities for market-linked returns$
- Gratuity, where the amount you get depends on your years of service and salary
- Life-insurance based group pension schemes providing life cover along with gratuity/ annuity
In both EPF and NPS, your employer and you both have to contribute a defined percentage of your monthly salary. The average rate of return on EPF schemes is often conservative. In NPS, the returns are based on the performance of your chosen funds. Also, you have to purchase an annuity, or a monthly-income plan, with at least 40% of your NPS maturity amount.
Even if you participate in a pension plan at work, opting for an individual retirement scheme as a back-up is advisable.
Individual retirement plans
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Senior Citizen’s Savings Scheme (SCSS)
- Monthly Income Scheme (MIS) from post offices
- Annuity plans from life insurance companies
- Unit-linked or traditional retirement plans from life insurance providers
An annuity plan offers a lifelong income stream. It effectively shields you against any shortage of funds in your advanced age. Some annuity plans provide a return of purchase& price, which can secure your dependents’ future financial goals and well-being in your absence.
Life insurance pension plans safeguard your loved ones against any financial shortfall if your pension stops due to an unfortunate event.
Also, with guaranteed1 returns from traditional policies, you can be sure of financial resources after you stop receiving pay-cheques. The market-linked products help you tap into the capital market’s - return potential, offering inflation-adjusted returns.
Hence, you should consider including such products in your retirement portfolio to avoid financial uncertainties during retirement.
Retirement Plans from Tata AIA Life Insurance
TATA AIA offers a wide range of retirement solutions to secure your financial stability after retirement. These are the different features that TATA AIA Life Insurance retirement plans offer:
- Life Cover: Tata AIA's retirement plans provide life cover, which ensures that in case of your untimely demise, your nominee and your loved ones will receive the sum assured for their financial security.
- Guaranteed1 Lifetime Income: Our retirement plans offer guaranteed1 lifetime income to you, which ensures that you have a steady stream of income during your retirement years for yourself and your family's needs.
- Single Pay Premium: Pay your premiums through the Single Pay premium mode as a lump sum investment and enjoy the plan's benefits for the rest of your life.
- Choice of Immediate and Deferred Annuity: The retirement plans offer you the choice of immediately receiving the payouts or after the deferment period. This can be selected at the time of purchasing your annuity plan.
- Choice of Single Life and Joint Life: You can choose between a single life (if you want life insurance coverage only for yourself) and joint life annuity (if you want to cover your spouse under the same plan).
Check different offerings and select a plan based on your budget and future financial goals. It will protect your old age from financial worries.