5 Common Mistakes People Make When Planning for Retirement

5 Common Mistakes People Make When Planning for Retirement

Retirement may be many years ahead, but what you do today will determine how smoothly you handle your post-retirement life.

Dreaming about your retirement is the first step; planning and working towards your retirement goals is what will actually get you there.

Here are some of the common mistakes to avoid and what to do instead.

Mistake #1: Not creating a retirement road map

What does your retirement plan look like? Retiring in your own farm house? Taking an exotic vacation? Or doing all the things on your bucket list?
Create a retirement road map to help you know what you want to do, how much you need to save and how you will achieve your goals. Here are some useful questions you could ask yourself to help you identify your retirement goals

• What kind of lifestyle do I wish to lead when I retire?

•  Will I continue working during retirement?

•  Will there be medical expenses based on my current health and that of my family?

•  What are my family commitments? Is my spouse and children dependent on me?

•  Will I still be paying rent or a home loan, or do I want to own a house?

•  Will I have travel plans? And how long will I want to travel and where?

•  Will I want to pursue a hobby that costs money?

 
Recommendation

A great way to map your retirement plan is to visualize what your retired years will look like, to give you a sense of how you can be prepared.

Mistake #2: Not knowing how much you need at the time retirement

Mr. Gupta is 55 and he has plans to retire at 60. He has so far saved 50 lakhs for retirement. However, to maintain his current lifestyle in the future, he needs to save at least INR 3 crores. With just 5 years to retire and INR 2.5 crores short, Mr. Gupta is in trouble.

Recommendation

While there are complex spreadsheets, a simple calculation can help you arrive at ‘the magic number’.

Mistake #3: Not starting early enough

Mr. Gupta and Mr. Sinha followed a disciplined investment process. Both of them invested INR 10,000 every year. However, Mr. Sinha started investing at the age of 25 and stopped at the age of 35, whereas Mr. Gupta started investing at the age of 35 and continued all the way until he was 65.

By the time both of them retire @65, Mr. Sinha would have acquired as much as 2.5 times the amount Mr. Gupta has, even though he invested only for 10 years, compared to Mr. Gupta who invested for 30 years. That’s the power of compounding.

For instance, you invest INR 10,000 that generates INR 1,000 interest in the first year, assuming interest rate to be 10%. In the second year you will be able generate an interest amount of INR 1,100. The interest earned in a year will generate additional interest in the next year. This is how compounding works to grow your money.

Recommendation

The effect of compounding is only realized if you give time for your money to grow. The earlier you start to save, the earlier you can retire.

Mistake #4: Not including contingencies such as health care expenses in your retirement plan

In your retired days, medical expenses is the most common contingency that you need to prepare for. Just one medical bill can exhaust your savings, leaving you vulnerable. You must ensure emergency funds are allocated to cater to your health care in your old age.

Recommendation

Make sure you factor in the costs of medical insurance and health care expenses post retirement when you plan for your retirement corpus.

Mistake #5: Not making smart investment decisions

Mr. Gupta invested in a bank FD which promised his a return of 9%. While it seemed to match inflation rate, Mr. Gupta did not factor into account the impact of taxes on his returns. Since he was in the 30% tax-bracket, his net return fell to a little over 6%- much less than the inflation rate.

Recommendation

Invest in assets like company shares or equity mutual funds that give you inflation beating returns (14-16% after tax) in the long term. This will help you speed up the retirement corpus accumulation and also get started with lower monthly investments.

When planning for retirement, it’s important to realize where you want to be, in order to know what you need to do to get there.

 

Happy Investing

Source:Scripbox