Ignoring spouse’s retirement needs A common oversight is not planning for the needs of the younger spouse, typically the female spouse. According to a January 2023 report by Pension Fund Regulatory and Development Authority (PFRDA), India’s pensions regulator, during 2014-18, life expectancy at 60 was 17.4 years for males and 18.9 years for females*. In India, the average age gap between male and female spouses tend to be 3-5 years**. With female spouses typically outliving male spouses by a significant period, retirement savings needs to be ample for both and should outlast the couple.

Inadequate planning for health expenses While Indians will be leading longer and more active lives i.e., “younger for longer,” it is also true that the health expenses typically rise during retirement. In India, the average age of leading healthy lives, or what experts call Healthy Average Life Expectancy (HALE), is about 10 years lower than life expectancy^#.

Clearly, it is important to have ample protection from large health expenses over long retired lives to prevent them from making a dent on retirement savings. This means a combination of adequate health insurance coverage in retirement along with ample emergency funds. The planning needs to also cover the possibilities of treatment for ailments affecting female spouses like osteoporosis, anaemia, cataract, heart ailments, breast cancer and neurological disorders like Alzheimer’s.

Neglecting estate planning Earmarking various assets to various loved ones and beneficiaries is an important part of retirement planning in late 40’s and 50s. This can be done by drafting Will where all assets and income sources are clearly earmarked to specific beneficiaries. Also, all investments need to have updated nominees, with ideally either of the spouses empowered to take decisions. This is especially important to ensure that spouses keep benefitting from retirement savings even in the event of physical and other health related disabilities. Also, in the absence of one spouse, the other can maintain the quality of life.

Relying on one source of income Regular income needed for various retirement expenses needs to be consistent and broadly stable. Many people make the mistake of planning for just one regular income source, mostly a low risk investment. This can make them vulnerable to the fortunes of a single investment category. Let us take a few examples.

Fixed deposits (FDs) are vulnerable to decline in interest rates when reinvesting their maturity proceeds i.e., they are vulnerable to reinvestment risks. Regular income providing annuities from life insurance companies provide stable regular income over long periods but suffer from erosion of purchasing power due to inflation i.e., they are vulnerable to inflation risk.

Rental income can get impacted by flatlining of growth in rental income or even the inability to find a tenant. On the other hand, adverse economic, financial and market conditions typically impact regularity of dividend announcements. Thus, one needs to have a diverse source of retirement income to ensure consistent regular income. This planning can be done during the countdown years to retirement.

Being too conservative Here, we refer to most or all of retirement savings being invested in lower risk, fixed income investments for regular income. This exposes the investments to the long term ill-effects of inflation on savings and the ability to maintain lifestyle. On many occasions this is the outcome of perceived “flight to safety” after episodes or periods of adverse market developments like a deep correction in the years leading to retirement.

Ignoring tax impact of income investments Given the long term impact of inflation, one needs income bearing investments to be just right to create adequate regular retirement income. The remaining retirement savings needs to be invested in growth investments like equity mutual funds like index funds and large cap mutual funds. They typically experience the least volatility among equity investments.

Converting all of retirement savings into income bearing investments also leads to a major spike in the income tax payout in early retirement. This leads to compounded growth on a smaller retirement savings amount, which typically impacts how long the retirement savings lasts.

Not having a withdrawal strategy It is important to determine current and imminent expenses and plan for a pecking order of tapping investments including those in equity mutual funds and debt mutual funds for regular income in retirement. This is important to deal with the tax implications of withdrawals and long term effects of inflation on purchasing power.

Using retirement money for child’s higher studies In India parents often bridge a shortfall in savings for children’s higher education by dipping into retirement savings including those in mutual funds. This typically happens in late 40s and 50s, in the period leading up to retirement. This provides truly little time to a person to recover from the setback to retirement savings.

For bridging a savings shortfall for a child’s higher education, there are loans like education loans, available for higher education and that too with unlimited tax deduction for interest payment under Section 80E. It is important to remember that no such option exists for bridging retirement savings shortfall.

Delayed decision on retirement housing A common mistake in the run up to retirement is delaying the decision on retirement housing. Often it is taken when retirement is imminent, or it is done with a part of retirement savings. Any home acquisition or relocation near or in retirement, makes significant dent on retirement savings. The same decision made earlier in late 40s and 50s helps spread the financial impact over the remaining years of work life.

Clearly, to drive home the advantage of retirement planning and disciplined retirement investments, you need to avoid these common mistakes in the years leading to retirement. This goes a long way in delivering to you the carefree and enjoyable retired life of which you have always dreamt.

Source Reference

*https://www.pfrda.org.in/myauth/admin/showimg.cshtml?ID=2511;

https://iussp.org/sites/default/files/event_call_for_papers/Levels%20and%20trends%20of%20age%20difference%20among%20couples%20in%20India_IUSSP2013.pdf

** (PDF) Determinants of the Spousal Age Gap in India: Analysis of Indian Microdata (researchgate.net)

#https://theprint.in/health/women-in-india-live-longer-than-men-but-dont-have-healthier-lives-finds-new-report/693104/