Kolkata, November 23: Saving for retirement is one of the biggest financial goals of our lives. Not only is a major goal as far as the quantum of the goal is concerned, it is a goal with the longest time frame. There are a lot of mistakes one may make when planning for retirement. If not corrected on time, these mistakes can magnify and throw your retirement plan out of gear. We look at five most common retirement mistakes people make.
1. Not having a plan: Many of us do not have a specific plan for retirement. It could be because we think that retirement is a goal that is far away. Or that if we save generally there will always be enough money for retirement. But failing to plan is to plan to fail. Like any other goal, one needs to plan specifically for retirement. The basic concept is to have an idea of how much money you will need each month after retirement. Then one has to assume a rate of return on investments till retirement and rate of return on the retirement corpus. Finally, one has to factor in inflation. Calculation of how much of a retirement corpus you need is the first step to having a retirement plan. Then comes choosing investment products, planning your investments and so on. It is recommended that you consult a financial planner for the same.
2. Not investing in equities: Many people are risk averse and shy away from investing in equity. They think that they will lose all their money when the markets tank. Others pull out money from SIPs when the markets perform badly. Not investing in equity will have disastrous consequences in the long run. Investing in equity can help you build a much larger corpus in retirement compared to investing in fixed return investments like fixed deposits. A simple example will explain the point. Let us assume that returns from equities are 12 per cent per annum and return from fixed deposits are 8 per cent per annum. If you are saving Rs 10,000 every month for 25 years the corpus that is built is Rs 59,29,472 in case you invest in fixed deposits and Rs 99,91,479 if you invest in equities. Your investments will have to be have to be made according to a proper asset allocation, but exposure to equities is a must, more so during the early years of your work life.
3. Underestimating retirement costs: Retirement planning depends on a few assumptions. One is the amount of money you would require every month for your retirement and the other is the length of your retirement. People tend to assume that costs in retirement will go down. But that is not always the case. Due to our lifestyles today, costs in retirement may be the same or even higher than what it is during our working lives. The other mistake a lot of us make is to underestimate the number of years in retirement. With increased life expectancy, retirement may last 30 years or more. Underestimating costs of retirement can thus mean arriving at a retirement corpus much lower than one you would actually need.
4. Neglecting health care costs: Healthcare costs are one of the biggest costs during retirement. Healthcare inflation is higher than normal inflation and certain health treatments and procedures will cost a lot more in the future. While medical insurance is a must, most of us might not have adequate medical insurance by the time we reach retirement. Hence it is important to build a healthcare corpus over and above the retirement corpus. Not having one, is a big mistake.
5. Dipping into your retirement savings: A lot of other life goals coincide with retirement. Chiefly among them is the cost for higher education of children. Many people tend to dig into retirement savings when they fall short on such goals, thinking that they will make up later. However, this turns out to be a costly mistake as it can make one’s retirement plan go haywire.
If you are making any of these mistakes, it is time to have a relook at your retirement plan.