Four Retirement Planning Mistakes To Avoid In Your 30s
When you're in your thirties, your retirement may seem a million miles away - but it's also an extremely opportune time to begin planning for what is bound to be a lengthy retirement. Indeed, experts are beginning to worry that the average middle-aged Indian is woefully underprepared to successfully live through what could turn out to be thirty non-earning years. Most of us are still counting upon a windfall profit or an inheritance to help ride us through, and this is unwise. For starters, here are 5 elementary retirement planning mistakes you should sidestep.
Letting your risk profile dictate your investment decisions
So, you're a low-risk taker for no appetite for equities? Never mind, just blindly divert your regular retirement savings (such as Mutual Fund SIP's) into an aggressive investment such as a mid-cap-oriented equity fund anyhow. If you allow your individual risk tolerance to determine where your retirement savings go, you'll likely end up earning anything from 6-8% lower (on a post-tax, annualised basis) than you potentially could. And make no mistake - compounded over a 25-year time frame, that's a mammoth difference.
Prioritizing your Child's Education instead
Sure - you aspire to send your beloved children off to the world's best university, and so on and so forth. But it would be a huge blunder to shovel away every last saved penny towards your child's education, without paying heed to your own retirement. Remember, you'll be able to avail education loans for your child's education, but not for your own retirement. Also, would you really like to become a financial burden on your kids at a time that they're just finding their feet in their careers?
Investing only in an NPS account
The NPS (National Pension Scheme) may be low cost, and a vast improvement over traditional endowment life insurance plans and fixed deposits; but they need more reforms before they can become a foolproof retirement solution. For one, the NPS bars you from taking more than a 75% exposure to equities. To make matters worse, your equity allocation is mandatorily slashed by 4% every year after your 35th birthday - and that doesn't bode very well for the returns you'll earn over the next two and a half decades.
Buying a Pension ULIP
It's a fact that ULIP's (Unit Linked Insurance Plans) have undergone massive structural reforms over the past five to seven years, but that doesn't take away from the fact that buying a pension ULIP is a misstep. When your pension ULIP matures, you can only withdraw 1/3rd of the funds tax-free under section 10(10D) of the income tax act. The remainder, you'll need to put away in a fruitless annuity that'll give you a tax-inefficient annual yield of anything from 3% to 5%, depending upon your tax bracket, and the option you choose. Just stick with regular Mutual Funds during the accumulation phase and you'll at least be free to deploy your retirement corpus as your heart desires!
