Retirement planning is an essential component of personal finance, it often occupies the last position for most in their priority list. Several surveys, time and again, have found people not adequately prepared to address the needs of their golden years. Even those planning for retirement tend to make certain mistakes that can prove costly. This article will focus on the biggest retirement planning mistakes that you must avoid.
Before delving deep into the mistakes, let’s understand what retirement planning is. This planning entails the process of building a sizeable retirement corpus that can take care of your retirement needs. In other words, it means preparing for a steady source of income when you hang your boots.
Planning for retirement allows you to be financially independent and fulfil aspirations that you would have missed while juggling between professional and personal commitments.
The age of pre-defined pension benefit is slowly diminishing. While our parents, who were mostly into government services, had this luxury, majority of the new generation workforce don’t enjoy this benefit. Hence, retirement planning becomes a top priority.
Today, most of the millennial workforce are openly embracing the FIRE (Financial Independence, Retire Early) concept with elan. They are planning to hang up their boots in their late 40s or early 50s to pursue other hobbies. This means a longer retired life. Hence, retirement planning assumes an importance of significant proportion.
When you depend on somebody else to take care of your needs, you can’t live life on your terms. You will not be financially independent. On the other hand, if you have adequately planned for retirement, you don’t have to worry about addressing your post-retirement needs. In a nutshell, you can lead a stress-free and independent life.
This is one of the biggest retirement planning mistakes to avoid. Retirement planning is the last thing on our minds when we start working and map our financial goals. An early start not only gives more time to your money to grow but also brings the power of compounding into play. Compounding has a steller effect on wealth creation and helps you build a sizeable corpus.
The table given below highlights this fact.
|
Starting Age of Investment |
SIP Amount in a Mutual Fund |
Assumed Annual Rate of Returns |
Investment Horizon (in years) |
Final Corpus |
|
25 |
Rs. 5,000 |
10% |
35 |
Rs. 1.9 cores |
|
30 |
Rs. 5,000 |
10% |
30 |
Rs. 1.13 crores |
*Assuming you wish to retire by 60. The figures are for indicative purposes only. Actual figures may vary.
Also, when you start early, the same allows you to adopt an aggressive stance as you don’t have major liabilities. You can invest a large portion of your earnings to build an extensive reservoir of funds.
The importance of asset allocation can’t be stressed enough. Asset allocation is nothing but another name for diversification. To create an optimum retirement nest, you must invest in a mix of fixed-return and market-linked products.
While our portfolio can have a heavy dose of equity in the initial years, you can taper it down as you near your goal. Optimum asset allocation can not only help you build a large retirement corpus but also protect it from eroding due to market volatility.
Most of us still hesitate to discuss financial planning with our family. We tend to keep these decisions to ourselves, keeping our loved ones in the dark. This could prove to be one of the biggest retirement mistakes. Note that retirement is not about your needs alone but also your spouse. Hence, you need to have an open discussion with your family regarding your finances and retirement planning.
An inclusive approach will help you find common grounds and set combined goals. Based on them, you can plan your retirement and make investments accordingly. This also helps to accommodate each other’s views, essential for a content life.
When you don’t keep a tab on these essentials, it can let your retirement plan go haywire. You need to watch your spending habits to ensure you are saving enough for your golden years. Also, mere savings will not suffice.
You need to spend the money to allow it to grow and counter inflation, which brings down its value with time. By smartly managing your spendings, savings and investments, you can build a retirement kitty that outlives you.
This is one of the retirement blunders to avoid at all costs. Medical expenses constitute a significant portion of post-retirement needs, and a health contingency can deplete your corpus thick and fast. Therefore, it’s vital to take guard against it by adding health insurance to your retirement kitty.
It not only prevents out-of-pocket expenses but also ensures that funds are a roadblock in receiving the best medical treatment. It’s advisable to buy health insurance early in life when you are young and healthy. Premiums rise with age as there are chances of developing age-related complications.
With rising medical expenses, it’s imperative for you to have adequate health insurance to remain financially secure.
You need to plan for retirement from the day you start earning. As said, an early start allows more time for your money to grow. At the same time, during planning, you need to factor in inflation to build a large retirement nest. For example, if your current expenses are Rs. 25,000, an inflation of 5% will push them to over Rs. 1 lakh 30 years down the line.
You also need to determine until what age you wish to plan expenses for. Growth in medical science has pushed up life expectancy rate, and hence your retired life could well stretch to 20 or 25 years, or even more. Therefore, you must have a corpus large enough to sustain you through.
Another essential lookout is not to divert funds meant for retirement for frivolous expenses. Most of us tend to use this corpus for non-essential needs, and this can prove to be a costly mistake. To simply put, refrain from using funds for retirement for any other purpose, except for the one it’s meant to be.
Overcoming these retirement planning mistakes can help you spend the golden years of your life as desired. The right investments coupled with a disciplined approach can help you live a stress-free retired life.
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