Living a financially-secured retirement life requires strong and disciplined financial planning for a significant period of time to build an adequate retirement corpus. Unfortunately, that is not done in most cases!
Living a peaceful and financially-secured retirement life should be one of the most important financial goals for each one of us. However, this requires strong and disciplined financial planning for a significant period of time to build an adequate retirement corpus. Unfortunately, though, retirement planning is low on the priority list for most, especially those in their 20s and 30s and hence, is left for too late – which most often than not leads to an inadequate retirement fund. In order to accumulate a big pool of funds for your golden years, here are the most common and the biggest mistakes you need to avoid:
1. Not starting early: Many individuals start planning for their retirement only when they reach their 40s, as it finally dawns on them that they are not too far from retiring. At this stage, since they have little time to create a corpus that should take care of them for at least 2 decades of retirement, they need to make big investments regularly. This is usually difficult due to the financial responsibilities people generally have in their 40s, like paying off a home loan, planning for their child’s higher education and marriage etc.
Remember, the earlier you start planning for retirement, the more time you give to your investments to grow. Consequentially, the more corpus you would be able to accumulate.
For example, for a 35-year old, a Rs 1.5-crore retirement corpus would require an SIP of Rs 8000 per month with annual returns of 12% on the investment, till the age of 60, whereas for a 25-year old planning to retire at 60, a Rs 1.5-crore corpus would require an SIP of just Rs 2300 per month in SIP, with 12% annual return. Therefore, starting early isn’t a choice, it’s a must. Begin your retirement planning as soon as possible to lead a comfortable post-retirement life.
2. Ignoring Inflation: Most people calculate their retirement corpus on the basis of current prices and income. Till the time you are earning, your income tends to keep pace with the rising costs of living, but when you retire, your retirement corpus is all you have. Even if you would be receiving pension, don’t be entirely dependent on it. Inflation gradually increases the cost of living as it reduces the value of your money over the years. Not considering the inflation rate leads to insufficient retirement corpus. Hence, always take into consideration the current and expected rate of inflation while calculating your retirement corpus. Use online retirement calculators to determine the amount of investment you need to make every month so that your retirement corpus is big enough to adjust inflation.
3. Insufficient health coverage: Medical expenses tend to gradually increase as a person grows old. With the ever-increasing medical costs, it becomes vital to ensure that you have enough health cover that can take care of various unexpected medical expenses at old age. If you fail to procure an adequate health cover for your post-retirement phase, you are more likely to end up using a major chunk of your retirement corpus for unforeseen medical costs. Do not remain dependent on the health cover or group health policies provided by your employer as these are active only till the time you are employed with them. Make sure you have bought an adequate health insurance plan early in your life and keep renewing it through timely premium payments.
4. Inappropriate asset allocation: While investing for your retirement corpus, your asset allocation plays the most important role. It refers to the strategy of allocating funds in various investment instruments such as stocks, bonds, real estate etc. Your asset allocation must change as per your needs and financial position. As you grow older, factors such as your lifestyle, income and risk taking ability change. When you are young, you have a higher risk appetite and can invest more in equity. Equity has consistently proven to fetch higher returns for long term goals. However, to ensure you have a sufficient retirement corpus, revisit your asset allocation periodically to make sure it is aligned with your retirement goals. Not doing so may lead to insufficient corpus getting accumulated, which isn’t capable of beating inflation.
5. Not reviewing your retirement plan periodically: Formation of a retirement plan isn’t of any use if it’s not implemented and reviewed properly. It should not be taken as a onetime activity as it requires periodic reviews. Since retirement plans are long-term plans, sticking to one single strategy would result in a faltered output. Any event in life which affects your finances and savings pattern will require an alteration in your investment strategy. Make sure you re-examine your retirement plan periodically so that the market changes, your lifestyle changes etc. are also taken into account.
(By Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com)