Retirement is an important phase of one's life. This is the stage where most of your responsibilities such as loans, education of children, and other liabilities should be taken care of so that you could spend your time relaxing doing what you like. This would be possible only if you have planned well for your retirement. Just like you plan to own assets, plan for your children's education or to make that trip abroad which has been on your bucket list, retirement planning requires a similar amount of attention.
Till recently, retirement planning was never given any importance as people lived in joint families, received pensions or were dependent on their children. However, with changing social structure, nuclear families being the norm, children looking to pursue their own careers, and parents looking to be more independent; retirement planning has assumed importance.
We bring some simple pointers on what are the common retirement planning mistakes that are generally committed and how to avoid them.
Not Starting Early Enough: This is one of the very common retirement planning mistakes committed by many. Often, individuals start thinking and planning for retirement only when they approach retirement years. This is a very wrong approach towards retirement. Ideally, planning for retirement should start quite early in your career. When you start earlier, you can start with smaller amounts of amounts set aside for retirement as you have the power of compounding on your side. For Ex: A small amount of Rs 1000 every month invested at 8% ROI for 20 years yields Rs 5,49,153 at the end of the period. Whereas, if you reduce the term by 10 years, you receive only Rs 1,73,838. You get almost 3 times the amount by starting a few years earlier.
Not Having A Realistic Check on Retirement Expenses: A retirement is an event that would happen sometime in the future. It is very essential for you to set your expectations right when it comes to expenses in your retired life. If you like to continue with your present standard of living, it is good if you can put a figure to your existing expenses and deduce your retirement expenses from that figure. During retirement, your day-to-day travel and fuel expenses may reduce, however at the same time you may need to cater for more expenses when it comes to salaries for help, medical aid, security systems, etc. Whatever the expenses are, an important figure that you need to cater for is inflation.
For Example: An expense that costs you Rs 10000 per month now will cost you Rs 26,532 after 20 years at 5% inflation. So, when you plan for retirement expenses, ensure you account for future expenses considering inflation.
Inappropriate Asset Allocation: Once you have a figure at hand for your retirement years, it is equally important for you to invest in appropriate assets which will grow to provide you the amount that you need for retirement. If you are too aggressive and risk-taking, then fluctuations/unforeseen events in the market may wipe out your retirement kitty. On the other hand, a too conservative approach may not yield you enough for your retirement years. Therefore, it is important that you take a balanced approach and spread your investments over a basket of assets. You may take the advice of a financial planner if you feel you are not equipped enough to make these calculations.
Carrying Debts into Your Retirement: You might have incurred debts throughout your working years for a number of reasons like building/ buying a home, vehicles, funding emergencies, vacations, or for your business expansion. You have the resources to pay for your EMIs during your working years. Do not make the mistake of thinking that you can carry your debt into retirement and keep paying out of your retirement kitty. Generally, lenders do take into account your age and cater for EMIs to finish within that period. However, there may arise situations where you decide to take early retirement. Or there are loans taken for your children's education with you as the guarantor/ co-borrower. In those cases, it is important that either you cater for those expenses. Dipping into your retirement fund will hurt your finances.
Ignoring Health Insurance: Health is a very tricky issue at any point in life. Living in a world which is plagued with unhealthy lifestyle and other diseases does not make it any easier for the retired. Add to it the rising medical expenses and it makes it foolhardy to step into retirement without a health insurance. Remember, during your working years, there is a company insurance policy (most often) to cover for your health expenses. However, after retirement, it's you on your own. So, it is good to go in for a health insurance during your youth when you can buy a policy for a smaller premium. As you age, many policies include a waiting period before any of your pre-existing illnesses are covered. And over a certain age, health insurance policies are not issued. Also, make sure that the policy is a comprehensive one, which caters for all possible treatments.
Additional Reading: 7 things to keep in mind while buying a health insurance policy
Retirement is a golden phase in anyone's life where you are meant to relax and spend time with your loved ones. Do not let the worries of inadequate retirement planning spoil this phase for you. Be prepared well in advance. Remember the golden rule- There are loans available for everything else but not for retirement, so you need to to save up enough!