One of the biggest blunders that people make is ignoring inflation. Imagine you were (are) living in the USA. From 1980 till 2021 you had inflation of 2% per annum. Now inflation is not just above 2%, it is at 8%! There is a whole generation of Americans who have not experienced inflation.
Luckily for us, we have always had inflation in India. However, many Indians who have experienced inflation also ignore - or underestimate inflation.
Of course when you are young it is difficult to imagine inflation in your ‘80s. I met a 82 year old who was earning Rs 5000 a year when he was 23 years of age. He now spends Rs 50,000 a month on himself and his wife. Just imagine would he have believed that ‘he would spend 10x his annual income on a monthly basis after 50 years’. Other way of looking at inflation is “it is negative compounding”. Remember this while planning for your retirement”.
Another big blunder is taking advice from talking heads - sales heads, fund managers, almost anybody willing to talk. They come and talk some nonsense like “Flexicap is the best fund to invest” or quote some old stuff like “the amount you have in debt assets is the same as your numerical age” - so a 25 year old should have 25% in debt and an 80 year old should have 80% in debt.
These are generalisations and should be used only with the understanding of complex topics like Asset Allocation. When you follow the herd you have to remember that there could be a cliff- and you could fall along with the herd!
Trying to time the market - when a person retires, he wants to look busy. Women don’t fall into this trap as much as the men do!
One way men keep themselves busy is trying to trade and timing the market. Trading is an expensive way to find out who you are.
Trading and timing the market can be dangerous for a newly retired person. Recently I saw a person wipe out his networth at the age of 64 years! It cannot get worse than that! Trading as well as market timing look attractive -but it is addicting, nerve-racking, and worse, it is crippling.
“Investing” in assets that people do not understand - Cryptocurrency, Gold, even Rental real estate. The problem with Real estate is that for older people to manage it - finding new tenants, maintenance, attending meetings of the society. It is not as easy as it looks.
To think that on retirement you will have a lot of time and will be able to manage a complex portfolio is not just wrong. It is completely wrong. Real estate has another disadvantage - partial liquidity is not possible. I see people making all these mistakes, and hurting their retirement corpus real bad.
Buying very expensive annuities - and all at a time is a very poor thing to do. If you Must buy annuities, buy it in 2-3 instalments.
This gives you a staggered pricing of annuities. Also make sure that you do not buy annuities far beyond your budget. The annuity is a very poor product - and is poorly priced. Stay away unless you have a good adviser who is asking you to buy it.
PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’