Often people don’t save and plan for their retirement, assuming that when the time comes, employer benefits will be enough. However, they will not cover all your retirement needs.
Retirement stirs in as a mixed bag of emotions. From happiness to anxiety, we experience it all. Free from work responsibilities and free to do what we have always aspired to, we have finally reached the Shangri-La stage in life. Simultaneously, we are burdened with questions like have we saved enough to get through the remainder of our lives with no steady income, how do we protect our money and whom do we trust for financial advice. It is easy to get overwhelmed with these worries, and one of the ways to be confident about the future is to avoid these 10 mistakes when planning your retirement.
1. Not saving for your Retirement at all
Often people don’t end up saving for their retirement, assuming that when the time comes, employer benefits like PPF and insurance will be enough. However, they will not cover all your retirement needs. You need to be proactive and plan for your own retirement. Even saving a small portion of your income adds up and contributes to your retirement corpus.
2. Not saving enough for your Retirement
Across your lifespan, if you prioritize today’s wants over tomorrow’s needs, you may not end up saving enough. Every year set aside 25% of your gross income towards your retirement. Although this may not seem like a lot initially, as your career advances, the amount adds up substantially.
3. Saving without a Plan
One of the biggest investment mistakes is saving without an investment plan. Earmark retirement as a goal separate from your other financial goals. Work with a financial advisor who will craft a goal-based plan which will help you live comfortably now and in the future.
4. Starting to save too late
Delaying saving for your retirement is another common mistake. We spend the first few years providing for dependents and taking care of our immediate needs. However, it is imperative to start saving for your retirement as early as your first job to ensure the returns are maximized. The compounding power of your investments will help you retire with a comfortable corpus.
5. Living burdened with Debt
Being in debt when there is no steady income is a serious concern. Live within your means and take loans for basic necessities such as a home loan. Ensure that your EMIs are structured in a manner that you pay off your loans and be debt free before you retire.
6. Investing in Debt at a younger age
When you are younger, you can afford to take on more risk. It is advisable to invest more in equity than debt at the start of your career and progressively move to debt as you near retirement. Investing in debt at a younger age would imply several interest payments from the get-go, without having a profitable investment build-up.
7. Not understanding the fine print
Tempted by high returns and capital appreciation, we forget to read the fine print and miss out on important information. Ask your financial planner to explain the details of the product, such as the lock-in period, risk levels, expected returns, etc. to you before you make a decision to invest.
8. Listening to casual investment advice
Bankers, insurance agents, and others tend to sell you plans that aren’t useful for you in the long run. Thus, leaving you with products that serve little to no purpose. Seek the advice of an expert financial advisor and invest your funds where your goals are met before the advisor’s interests.
9. Spending from your Retirement fund
When in need of cash, many opt to liquidate investments from their retirement plan. The idea being that this money is not required now and, therefore, can be easily replaced before the hour of need. This myopic approach will short change you in your later years. Avoid touching your retirement fund unless absolutely necessary.
10. An emotional approach to your money
Avoid getting emotional and parting with money from your retirement fund to help friends and relatives with their financial needs. Repayment is not guaranteed when you lend and could lead to you requiring financial help in the future.
A ‘One Size Fits All’ approach does not work when planning your retirement. Your plan should be based on your current age, asset base, expenses, and overall risk profile. Your investments will depend on your liquidity needs and financial goals. Avoid these mistakes in investing when planning your retirement and you will be set to enjoy your golden years in comfort and peace, without compromising on your current lifestyle and goals.
(By Amar Pandit, CFA and Founder, Happyness Factory)