Deepak Gagrani highlights the pitfalls seniors must avoid to enjoy one of the most glorious phase of their life
In an era of falling interest rates and increasing life span, financial planning has assumed significant importance for senior citizens to effectively manage their retirement corpus. Gone are the days when a passive investment strategy could help generate commensurate returns to take care of sustainable income levels. A well=defined investment strategy, aligning the investor’s goals and objectives with their risk profile, is as important in the wealth management stage of an individual, as was in their wealth creation stage. One has to remember that ‘An individual retires; their money has to continue to work for them’
As one steps in retirement, flush with a sizeable cash corpus, they are at risk for making some common financial mistakes. Certain seemingly small investment mistakes can hinder the financial planning process considerably. Few pitfalls which one must avoid to enjoy one of the most glorious phase of their life.
- Extremely Defensive Portfolio
As an investor embarks the retirement phase, there is a tendency to adopt a very defensive strategy and invest the corpus in regular but low yielding income generating products, thereby leading to miss-out of the large growth potential of the corpus. Most of us have come across the rule of ‘100 minus age’ as a way to determine investment allocation towards equities or other growth asset class. Such a generalisation has been one of the biggest investing fallacies being practised and has negatively impacted the portfolios of many seniors.
“Successful investing is about managing risk, not avoiding it” as said by Benjamin Graham is relevant at all stages of life
A more rational approach of asset allocation is to segregate funds basis their end-objectives.
- Investments that generates regular income to take care of routine expenses
- Emergency Fund
- Money which is not needed for at least 5 years, should be invested in growth asset class such as equities, real estate etc depending on prevailing asset class cycle.
With the increasing life span, the retirement stage can also be a fairly large period. The last category of investments will not only help retired citizens to comfortably enjoy their retirement phase, but also leave a financial legacy that outlives them, for their heirs.
- Excessive Indulgence
Exactly opposite of the above, when an investor gets a large lumpsum corpus on retirement in the form of provident fund, gratuity etc, an illusion gets created that there is lot of money. The same is then spent on a lot of unnecessary expenses, without considering the long period ahead without the regular monthly income. While it is absolutely essential to spend on oneself, the idea is to strike a right balance between excessive indulgence and frugality.
- No / Inadequate Medical Insurance
One of the biggest mistakes is to underestimate the potential medical expenses and not plan for any medical contingencies. The single-most important element of financial planning for senior citizens is to have a sufficiently large medical insurance cover. A shortfall in medical insurance can put a severe dent in the overall retirement corpus. While the appropriate amount will depend on case to case basis, but as a thumb rule a retired couple should have at least a medical cover in excess of INR 10 lakhs.
- Expensive, illiquid products sold as investments
A very common mistake that retired investors are susceptible is to be mis-sold annuity/pension schemes packaged together with insurance. Such products are not only expensive, but also very illiquid. Technically, there is no need of any sort of life insurance during this stage of life and hence any product (investment) being sold under the premise of insurance should be completely avoided.
- Rich, but Cash Poor
As the heading says, a lot of senior citizens experience this problem of being quite wealthy but constrained by low cash levels. This is a result of appropriating a high percentage of the wealth towards illiquid assets. This could lead to dependence on children or need to dispose of such illiquid assets in distress, both situations which are not desirable. Hence it is absolutely critical to ensure sufficient liquidity as all times.
- Inadequate Succession Planning
Succession planning, as a concept, is still in a very nascent stage in India and mostly limited to a very limited set of families in the society. As an important part of financial planning, it is absolutely imperative for an individual to ensure that there is a very clear set out succession plan and all the impacted parties should be appropriately kept in know-how of the same. This ensures a seamless transition of one’s financial legacy.
- Reliance on Family & Friends for Investments
A very common mistake which investors are prone to commit is to rely on family and friends for investments or simply replicate their investments. One has to understand that every retirement journey is different and hence cannot follow the same path. It is therefore important that one seeks qualified professional help with respect to a holistic financial planning. While this is relevant for an investor at any stage of life, this assumes more importance in the retirement phase as the potential to reverse a mistake is quite low during this stage of life.
When you know what not to do, the path to success is clear. In the journey of retirement, one has to ensure that they avoid these mistakes to ensure a less bumpy road ahead. In the next edition, we understand the various investment options suitable for retired citizens that help them achieve their desired goals.