Retirement planning is like jogging. You know you start doing it today but you keep postponing it. Your retirement may be decades away but that doesn’t mean you ignore it. Proper planning today can help you enjoy a great retirement life in the future. However, many people make a lot of mistakes when it comes to retirement planning.
Here are a few you should avoid:
Late start
Many investors avoid retirement planning until the last moment. This can negatively impact your retirement corpus. There is a common saying when it comes to road trips: start early, drive slowly and reach safely. This principle can be applied to retirement planning too. The earlier you start investing, the greater will be your final corpus. Even a difference of ten years can make a huge difference to your retirement fund.
Take the following example:
Suresh starts investing for his retirement at the age of 30. He regularly invests Rs 10,000 per month in a SIP. The fund earns him 15% rate of interest. His colleague Giridhar starts investing at the age of 40. He invests Rs 12,000 per month. Both of them retire at the age of 60. At the end, Suresh has amassed a corpus of Rs 7 crore. On the other hand, Giridhar has earned only Rs 1.8 crore.
Lack of proper planning
Not many people know how much money they need for their retirement. So even if they invest for retirement, the returns they earn can be much lower than what they would actually need. For example, Sanjay creates a corpus of Rs 4 crore for his retirement. He expects that this amount will be enough to finance his expenses for 20 years. But what if the funds are not enough?
The first step is to identify your needs and requirements during your retirement. How much money do you need to maintain your lifestyle? Once you retire, your income stops but your expenses continue. In fact, they may even increase during the retirement phase. You need to account for all these expenses and provide for them.
Underestimating cost of health care
In this current day and age, the cost for quality health care is sky rocketing. Older people are more exposed to health concerns. And as a retired person, it is extremely important to ensure that you are prepared to meet these expenses. Otherwise, your hard earned savings can quickly go toward medical expenses leaving your finances depleted.
Make sure that you buy a good health insurance plan for yourself and your spouse for the retirement phase. Also create an emergency fund in case you need to pay for medical expenses urgently.
Poor investment decisions
If you have Rs 1 Lakh to invest for your retirement, you can invest it anywhere you choose. But remember that different investment avenues offer different returns. For example, bank savings accounts offer around 4% returns while fixed deposits give around 8%. In comparison, equity mutual funds and stocks offer anywhere between 10~15%. Sometimes, these returns can be even higher.
By choosing a wrong investment avenue, you can lose out on good returns in the long term. It is ideal to invest in equity funds for retirement. This way, you can benefit from high returns at a faster rate. And as for the risk, it shouldn’t be a great issue since the long investment term can help you comeback from any downfalls in the market.
Dipping into your retirement fund
Praneet had been meticulously saving for his retirement when his son announced that he was going to do an MBA course in Australia. The course cost around Rs 20 Lakh rupees. Not wanting to disappoint his son, Praneet decided to dip into his retirement savings to fund his education.
A lot of parents dip into their retirement funds to finance other financial goals that come along the way. This is not a wise step. This is because it is possible to finance your son’s education through other sources such as bank loans. But once you take out money from your retirement fund, it may not be possible to rebuild the corpus. This can be especially problematic if you are close to retirement. As a result, your fund would be depleted and you wouldn’t be able to enjoy your retirement as you hoped. Always seek out better alternatives to finance your other goals. Don’ dip into the retirement fund unless it is absolutely necessary.
Conclusion
Retirement is like a second childhood. People discover new hobbies and a new zest for life. But to make it truly special and comfortable, you need to have a solid financial backup. And for this, you need to start planning for your retirement today.