Beware of the Retirement Rules of Thumb

Over last couple of decades, the definition of ‘retirement’ has undergone sea change. Will Retirement Rules of Thumb be good enough to achieve our most important goal?

Rather than viewing retirement as relaxed life filled with leisure, most people nowadays dread retirement. Indeed, some go as far as pleading with their employers to extend their terms beyond the acceptable working age of 60 years. Some people “retire’ early from jobs only to pursue careers like consulting or enter business. Few avail of voluntary retirement for financial benefits it brings but most don’t have a retirement plan.

Retirement Rules of Thumb

Regardless of what age one decides to retire from work, people tend to follow the flock by following the proverbial flock. They invest in mutual funds to ensure continuum of lifestyle they enjoyed while working. Health concerns, fears over destitution in old age, vulnerability to crime and a lot of considerations come into play prior to retirement. This forces most women and men to take decisions based on traditional ‘rules of the thumb.’

These much-hyped rules of the thumb can very often prove counterproductive. Rather than ensuring you have a happy retired life, they bog you down with financial worries, loneliness and in extreme cases, mental and physical trauma. Thousands of unfortunate retirees end up penniless destitute or live life of penury with charity from their children or institutions.

Here we list some of these typical rules of the thumb you may consider flouting.

Read – Is Rs 1 Crore enough for retirement?

Relocating home

Generally, most people plan their retirement when they are around 40 years old. Fair enough. Residents of large metro cities are eager to settle in smaller towns or villages in their native state. One of the rules of thumb is to invest in a dwelling in these places, where life is sedate and far from the hustle and bustle of cities.

Firstly, relocating to a small town or village is not advisable in India. The reason: Every state of India is at different levels of development. Facilities, amenities and services you take for granted in large cities including uninterrupted power supply, superior healthcare facilities, faster transport systems, telecommunication infrastructure are conspicuously absent in towns and villages.

Selling your apartment in a city to live in a palatial bungalow in village can thus prove disastrous. Firstly, you will have sold an urban property whose rates would rise to invest in a house in semi-urban or rural area that will have few takers. Further, money you get from sale of this property has to be invested in other real estate worth an equal amount, within a stipulated period. Failing to do so can attract heavy capital gains tax. Of course, you have options to invest in government bonds and other financial instruments. However, low interest rates and the minimum ‘lock-in’ period make such investments useless. Never leave your urban home since you will have distanced yourself from friends and relatives. You can also lose lots of money on relocating.

Life insurance

Contrary to popular belief, life insurance does not offer you any hedge against inflation. Nor does your life insurance policy earn any attractive interest. With due respect to insurance companies and their agents, life insurance often earns you what we define as “negative interest.” Meaning, your money can work and earn better in other financial investments when compared with life insurance.

Understandably, you would want to ensure your spouse or kids have sufficient money in event of your death. Life insurance provides a solution. Deft marketing techniques combined with fear account for sales of most insurance policies. Tax benefits offered by the Indian government on insurance policies add to their charm.

However, any good financial expert will explain, life insurance is not a great long-term investment option. There are several others such as Mutual Fund Systematic Investment Plans (SIP), real estate, stocks and even gold, which offer better hedging to your family compared with life insurance.

Public Provident Fund

Over the years, Public Provident Fund schemes offered by banks and India Post have lost their gleam. Interest rates are dropping consistently, making returns on your investment lesser attractive than a few decades ago. PPF requires you to deposit a fixed amount in your bank account over a certain number of years, based upon your age. Your capital and investment is returned with the interest by the bank.

While PPF is a relatively safe investment, current interest rates hover around 7.5 percent to 7.8 percent and sometimes eight percent, depending upon where you open the account. You can open a PPF account with as low as Rs.500 per month deposit. The maximum amount you can invest in PPF is Rs. 12,250 per month or Rs. 150,000 per annum.

The flip side of PPF: You have to lock-in your money for a minimum period of 15 years. Partial withdrawals are possible only during the sixth year of your PPF account operations. SIPs and select Mutual Funds with low risk offer higher returns than PPF, in some instances.

Health Insurance

Another so-called ‘rule of thumb’ for retirement is to buy health insurance. Understandably so, since nobody knows what illnesses and ailments old age can bring. However, it is worth remembering that most health insurance does not cover medical conditions that prevail while buying the policy. Insurers insist on a health check before issuing you such policies since they want to safeguard their interests and are least bothered about your wellbeing.

Secondly, most health insurance policies cost a higher premium if you buy them at an older age. You may inadvertently end up wasting your precious earnings for anticipated treatment for disease that may never strike in your lifetime. Instead, this money can be better invested for quicker and higher returns that can adequately cover any medical emergencies.

Further, most health insurance policies come with fine print: They do not cover a large spectrum of illnesses during the first, second and third year of holding. In the unfortunate event of you getting afflicted with a major illness during these years, a health insurance policy is as good as useless. You will cough up large amounts of cold cash for your treatment.

Read – Where is your post-retirement plan

Cautious spending

Living frugally after retirement is fine only if you are unfortunate not to have a pension. A lot of retirees fail to enjoy life in their old age fearing their money would run out before they pass away. Instead of spending on a good life, they stash away cash in fixed deposits or other financial instruments that are of little use once they cease to exist on Planet Earth.

The ‘rule of the thumb’ that dictates retirees should exercise thrift is a sheer myth. Should you have sufficient investments made during lifetime in SIPs, stocks and bonds, own a house and have regular income from these to draw upon, there is no point in saving your pension.

Sadly, a lot of retirees live poor to die rich. Of course, we do not encourage you to get reckless and splurge your pension on stuff you do not require. Yet, we see no reason why you should be deprived of comforts and leisure during your old age. You can earn a decent monthly income through various investment options that can be funded through your pension.

In conclusion

Without prejudice towards any banking or insurance schemes that flourish in the market, we strongly recommend you seek advice from reputed experts about your money and investment plans for retirement.

Also, remember that joint accounts also come with various clauses. In the event of your death, your survivor has to inform the bank about your demise and get nominated as the primary account holder. The ‘either-or-survivor’ clause can be used against your spouse or other beneficiaries, if they fail to notify the bank.

Additionally, we also recommend you draw a proper will, with explicit details of who inherits your money and property. Leaving for heavenly abode intestate can cause extreme hardships for your survivors.

This is a Guest Post by Garima from SureJob

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