5 common mistakes when it comes to Retirement Planning
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Retirement planning, in a financial context, refers to the allocation of savings or revenue for retirement. The goal of retirement planning is to achieve financial independence even when you are not working.
Retirement planning is one of those things which will never come in the priority section of your checklist at least in your 20s or 30s but once you turn 40+ you start panicking about retirement and its expenses.
Here are a few retirement planning mistakes you should avoid:
1. Not realizing its importance
Retirement is that phase of life where you would want to reward yourselves for all the hard work you have done. Retirement is where you have time to go on your dream vacation, spend time with young family members, buy a second home and fulfil all other aspirations you never had time for. It is important to have a retirement roadmap in which you can list down the things you wish to achieve post retirement. This will give you a clear indication of your future expenses and the amount you need to save for the retirement goals you want to achieve.
2. Not Estimating the Correct Amount Required
At present you may have a well-paying job which has enabled you to live a lavish lifestyle. But what happens when this income stops? You may not be able to maintain your current lifestyle without a regular flow of money. Estimate your current expenses, factor in the inflation in the interim period. Also consider medical needs, household needs and a small portion for unexpected expenses. If you need 50 lacs or a crore annually to live life comfortably after retirement, you may need to save a larger amount annually to meet your target. If you’re clueless about the required amount, you may end up with a substantially smaller fund than your needs. This will not only hamper your retirement goals but also affect your lifestyle.
3. Waiting for the Right Time:
It’s simple, the earlier you start the better your returns. You may start investing at the age of 25 and stop at the age of 50 or keep a casual approach by starting to invest huge amounts when you are 40 and end up getting marginal returns. There are two major benefits of starting early; you get into the habit of saving and when you are 25 responsibilities are comparatively lesser so it’s easier for you to save some part of your salary. As you do it year by year, this habit of investing gets inculcated within you and it doesn’t seem like an additional effort. The second benefit is the magic of compounding. Compounding effect is nothing but earning interest on interest. Through compounding even a small amount, invested regularly can turn into a sizeable corpus.
4. Not Accounting for Medical Emergencies:
As you grow older, your medical expenses tend to increase. These medical bills can exhaust all your lifetime savings. You must be prepared with emergency funds to help you with your health care post retirement. Sedentary and hectic lifestyle has given rise to various critical illnesses as well. Think through the potential contingencies that can occur, plan and secure yourself against them.
5. Not Investing in the Correct Instruments:
Traditionally, we are inclined to invest in avenues which promise a return of around 7%-8%. This could be because people around us have suggested such investment instruments to us. While it may seem the right option, we forget to take into account the impact of taxes on our returns. If you’re in the 30% tax bracket, your net return shall fall to a little over 6% – much less than the inflation rate. Choose an instrument which gives you a relatively higher post-tax return so that the real rate of return is more than the rising cost of living.
Plan your retirement wisely. Decide on your goals, the amount you will need to fulfill your goals and aspirations, your livelihood and health expenses. Don’t delay, start investing towards your goal today.