Don’t let these four mistakes derail your retirement plans

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Published: December 18, 2018 12:08:05 AM

Do you know what will be the value of today's Rs 1 crore 30 years later? It will be Rs 23 lakh if you consider inflation at 5%. So, in three decades a neat sum of today can become less than one-fourth of its value

Don’t let these four mistakes derail your retirement plans (Illustration: SHYAM Kumar Prasad)

Retirement is a long-term goal. Our behaviours often get moulded by what happened yesterday and what will occur tomorrow. So, when the target is years away, there is a chance of missing out on important things. Therefore, investors need to be very careful while planning for retirement.

Small mistakes of today can get amplified over the years and become an error of epic proportions. The sad part of long-term goals is that when you realise that there is a miscalculation, it is too late to correct the course. So, it pays to be on guard. Here are some mistakes that you should avoid.

Failing to consider inflation

Do you know what will be the value of today’s `1 crore 30 years later? It will be `23 lakh if you consider inflation at 5%. So, in three decades a neat sum of today can become less than one-fourth of its value. While planning for retirement, many commit the cardinal mistake of avoiding inflation. If you forget inflation, you are setting up yourself for a poor standard of living when you are old. So, investments for retirement, which is typically 25-30 years away, need to be made with an adequate calculation about inflation. Assume inflation around 6-7% and then compute what your retirement corpus needs to be.

Too many dates with debt

Too much of fixed income is a disease that is eating away many a retirement portfolio. While post-retirement is a time to invest one’s money in conservative investments, you cannot have the same approach while building the nest egg. Many investors prefer and recommend large allocations to fixed income as the investor nears retirement age. Such recommendations are tricky because they ignore the negative effect of rising rates on the value of a portfolio. Fixed income hardly beats the rate of inflation and if the interest rates do not beat inflation, you are virtually paying money to be invested in debt avenues. This is also a reason why you should stay from annuities. Such guarantees extract a high cost: typically, an annuity will pay back your original investment only by the 16th-17th year.

Do not be too aggressive

It is the dose that makes it poison. Many people accumulate much of their retirement corpus wealth using equities. But what they often forget is that the fall could hurt too. By choosing to adopt aggressive strategies, you could end up losing the same money that you so painstakingly built over the years. Being aggressive is a good approach but being too aggressive is counter-productive.

Underestimating healthcare costs

Medical inflation in India is growing in double digits. You can blame it all you want, but that is not going to change things. Surgeries, diagnostic tests, and medicines are becoming expensive if you want quality. This high cost for healthcare is waiting to pounce on you once you leave the workforce and the protective shield of your employer’s health insurance policy. The medical and healthcare inflation factors need to be considered well ahead of time.

Retirement planning requires meticulous thinking, thoughtful execution, and continuous monitoring. When done well, it will ensure a peaceful and independent life after you decide to hang up your boots.

Unlike any other financial goal, retirement can’t wait for another five or six years if there is a shortfall. Hence, it is pertinent that mistakes be avoided from the very first when it comes to retirement planning. Losing less is winning more.

The writer is founder and CEO,
Right Horizons

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