8 Pitfalls To Avoid While Planning For Retirement

By | March 26, 2018

For a hassle-free retirement, you must start planning early.

We all dream of having a peaceful retirement life where we can do the things we love and indulge ourselves in leisure. To fulfil these dreams without monetary hassles, we make investments that we believe can give us maximum returns to meet our expenditures and live a stress-free life post our working days. But setting up a secure retirement life needs careful planning and execution.

As most of us are not experts in financial planning and rely mostly on our own research online or from friends and relatives to invest for retirement, we do occasionally commit mistakes that can eventually make our retirement life a nightmare. Therefore, if you are planning for a secured retirement life, you should avoid certain financial pitfalls that may cause hindrance to a better future.

Starting Late

In our youth, we put retirement planning on the backburner as we are focussed on getting a house, a car, getting married, and taking care of our children’s needs. By the time we start planning for a secured retirement life, we are already in our late 30s. This is a cardinal mistake as saving early for retirement helps you enjoy the benefits of compounding. Let’s understand this with an example. If you’re 25, plan to retire at 60, and invest Rs. 5000 a month expecting annual returns of 12%, you’ll have a corpus of Rs. 3.2 crore when you’re 60. But if you start the same investment plan only 10 years late, from the age of 35, your corpus at 60 would be only Rs. 94.9 lakh, which could be woefully inadequate in your retirement. If you start saving for retirement in your 20s, it will help you get a large corpus of fund for retirement than starting in your 30s. If you start saving late for retirement, then you would only have to shell out larger sums per month to meet the desired fund for retirement.

Not Clearing Debts Before Retirement

Debts are a crucial part of our everyday financial portfolios. You might have to take a home loan, car loan, and educational loan for your children to fulfil yours and your family’s dreams. You should aim to settle these loans before retirement. Otherwise, it will be a burden for you in the twilight of your career when your income-earning capacity will be reduced.  Simultaneously, you also need to take care of investment for retirement. Your long-term investment plans for retirement should not be compromised for short-term gains. So adopt a financial policy to not only pay off your debts but also save enough for retirement.

Not Factoring In Inflation

Considering the inflation rate over the last 20 years in India, Rs. 100 in 1997 would hold the same value as Rs. 352 in 2017. Most people plan for a retirement corpus depending on their current lifestyle and monthly expenses. They forget to take inflation into account. One must invest in such a way that they beat inflation and meet the required corpus needed for their retirement to meet the future lifestyle and its expenditures.

Not Having Health Insurance

We tend to ignore health insurance when we are young, believing we are too young to fall sick. Or we just rely on our employer’s group health insurance to cover our risks. Remember that company group insurance will be available to you only till your employment lasts. Your company may even curtail health benefits to cut costs or change insurers which will see you losing out on the benefit of waiver of the waiting period for pre-existing diseases. Plus you get an exemption of up to Rs 25,000 under Section 80D for medical insurance (if you’re under 60), which helps in tax-saving.

Besides, your medical needs will only increase during your retirement days and if you are not covered appropriately, it may eat a chunk of your retirement corpus. Hence, it is advisable to have an individual health policy early in your life to secure yourself.

Not Making Tax-Efficient Investments

While searching for investment tools, we often want to bet on options offering high returns and tend to ignore valuable retirement options, like Public Provident Fund. It is one of the best retirement options, has a 15-year locking period and the best part is that interest on PPF is tax-free. Plus contribution to the fund is eligible for deduction under Section 80C for you to save tax during your working years. In comparison, earnings from a fixed deposit may be taxed as per your slab. For example, you buy an 8% FD, but you’re in the 30% tax slab, and your absolute returns are just 5.6%.

Not Making Contingency Plans

In case of an emergency, we tend to break long-term investments or savings, which can have a negative impact on the corpus for retirement. Hence, in such a situation, it’s important to create a fund to meet such emergencies and cover your expenses over six to 12 months.

Not Diversifying

Do not put all eggs in one basket, an advice that most financial planners will give you. Pouring all funds into one scheme could be risky, and you may also not be able to access your money when you need it. You must have a balanced portfolio of equity and debt to get high returns, but also keep some liquid funds at bay for emergencies.

No Flexibility In Planning

Adopting a fixed approach towards retirement planning can also be risky. Factors like a change in job, a birth of a child or medical emergency can alter your savings plan drastically. Hence, it is important to analyse your retirement strategy periodically to cover market and lifestyle changes.

It is important to have a retirement plan but is more important to avoid mistakes that can cut into your retirement fund. Hence do consult a financial expert who can guide you properly to secure your retirement life.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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