Retirement is another inning of one’s life. Adequate planning is vital to enjoy the joyous phase of retirement. Retirement planning is an essential part and must be given due consideration in your early working age. Many of us tend to commit the following retirement planning mistakes which are following and must be avoided:
1. Delay in Retirement Planning
The most common mistake is that people tend to start about their retirement planning at a delayed stage. It is the golden rule for retirement that the day you get your first pay cheque is the day you should start investing in funds for your pension. When you start your career you generally don’t have major liabilities. A large proportion of your earnings can be saved at that stage and wisely invested. It allows your money to grow at a progressive rate as you have a longer duration to keep your money invested for your retirement phase. Decisions taken at a later stage when you are close to retirement will not fetch you enough funds sufficient enough for a future income stream. Starting early allows your money to grow. Each gain generated results is a generation of further gain. With the benefit of compounding, you can grow your money exponentially over time.
For example, A & B are two friends of same age started their retirement planning. A started saving Rs 5,000 per month at age 20 and earn 12% returns p.a, A will have Rs 5.94 crore in his retirement kitty when he retires at 60. But B, started at age 30, and will be able to accumulate Rs 1.76 crore with the same interest rate. The 10 additional years that A gave to his money did wonder for his financial well-being.
The more you delay in your retirement planning, the more you will have to save per month. Also, starting late will insist you to grow your money exponentially to attain the desired retirement corpus which will tend you to invest in riskier investments.
2. Ignoring Inflation
Inflation is the rate at which prices rise. The impact of inflation is that it reduces your purchasing power considerably. Rs 1,00,000 today will be worth Rs 13,000 after 30 years assuming 7% inflation.
It basically signifies that, commodities and services will become expensive with inflation and some years later will enable you to buy much less with the same amount of money in hand. Ignoring inflation is a grave mistake which means you will save much less than what you will need years down the line. Inflation is the critical factor that can spoil your retirement plans if not taken into consideration. Retirement is a long-term objective, so avoid Retirement Planning Mistakes, it is crucial to assess the impact of inflation on your retirement investment goals.
Taking inflation into account will not only tell you how much you have to save but also enable you to decide the most apt investment strategy. The bottom line is that “the investment vehicles that you choose should offer return more than the prevailing inflation rate.” It is not advisable to assume a conservative rate of inflation as due to market conditions being volatile and increasingly changing; economic cycles are causing the rate of inflation to rise. It is imperative to take the realistic projections of future inflation rates which will help you in building a robust retirement corpus. You can make an average of the past few years of inflation. You may use a retirement calculator to check how inflation can affect your corpus.
3. Wrong Asset Allocation
Wrong asset allocation is another mistake which could turn around your actual retirement funds versus your expected fund. It is important to invest in the right kind of investment. Allocation to investment is similar to oxygen to human life.It is majorly found that 91% performance of a portfolio is based on the asset allocation. What securities you have selected, the timing of securities and others factors constitute the remaining 9%. Right asset allocation is vital as every asset goes through different phases of ups and downs and has different risk-return contouring or profiling. Diversification of assets is an essential part and is required to get optimum returns.
It is essential that people invest in different investment vehicles based on their risk appetite but sometimes being too conservative and overlooking the equities altogether is not prudent. We discussed that the rate of return on investment should be higher than the rate of inflation. So to beat inflation investment in a growth asset like equity can fetch good returns over the longer duration.
However, it does not imply that you should invest all your funds in equity related investment. Debt also plays a crucial role in the asset allocation by offering stability and solidity. The bottom line is to go for the right kind of asset allocation. The right allocation between debt and equity is essential and will also depend upon your risk appetite. The golden rule is the more time you have to retire, the higher exposure towards equity can be done, and lesser time to retirement, you should have more towards debt to forfeit any scope of market fluctuations.
4. Relying on Employer’s Health Cover
Medical expenditure rises as your age advances. Many of us don’t buy individual personal health insurance policy during the working life as many of us are covered by our employers under a group health insurance policy. Relying completely on employer based health cover is another blunder in a retirement planning mapping. Employer related health insurance will fetch you benefits until the time you are employed with the employer, and it stands void once you leave your organization.
With rising age, the premiums for a health insurance policy also rises. Medical inflation is also on the rise and a
single hospitalization can drain your savings.It is important to have your own personal health insurance policy taken at an early stage to offer you cost benefits. It is not only cost-effective when bought at early stages but also incorporate preexisting illnesses after completion of the waiting period. Also, it will offer you benefits irrespective of your employment. Not only buying health insurance would suffice rather buying a substantial cover is important basis cost of treatment, city type (metro or non metro) and inflation. If you cannot afford a higher sum insured, you may buy a health plan with a minimum sum insured and boost your cover with a top-up cover. A top-up plan triggers when a fixed amount called deductible is crossed. It also offers tax benefits under Section 80D.
Health expenses are one of the major expenses in old age and consume maximum of your pension income. So it is important to have an arrangement in the form of a health plan to subside your expenditure.
5. Clueless about how much to save to Maintain the Same Lifestyle After Retirement
How much to save to maintain one’s current lifestyle after retirement is the most vital question when planning for retirement. It is important to assess your lifestyle regarding a quantum. To maintain the same lifestyle, it is important to invest the right amount. The greater the amount invested, the higher the effect on your monthly budget where as a lower investment amount means that you have to cut some of your expenses in the future. Also, a medical emergency or an unexpected expense could destabilize your budget for retirement if not accounted for in the planning so avoid Retirement Planning Mistakes. It is thus vital to calculate how much you need to save for your retirement years in order to maintain the same lifestyle along with keeping the reserve for any unexpected expense. The use of various retirement calculators can be helpful to assess your contribution towards a requisite amount of retirement corpus of pension income.
In a nutshell,
Being aware of the mistakes and avoiding them while planning for retirement can safeguard you from financial plights in your post-retirement phase. For this it is important to be prudent with your investments, save for unforeseen setbacks, account for inflation, make a realistic assessment of your retirement budget and give more time to your money to grow. It’s better to be alerted about common Retirement Planning mistakes than to regret later.