Don’t Carry Financial Baggage – Avoid These Retirement Planning Mistakes

20 Dec 2022
6 min
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Ernie J. Zelinski quotes, “Retirement is a time to experience a fulfilling life derived from many enjoyable and rewarding activities”. And one such rewarding activity is retirement planning.

Planning for retirement used to be much simpler. There was a time when your children proved to be the best retirement benefits. You worked for the same company your entire life, invested in your child's future, and retired at 60 with a gold watch and a pension to allow your child to care for you in your golden years. The truth has undoubtedly faded with time.

It's more complicated nowadays, and the need of the hour is to devise a smart retirement strategy. Life expectancy is rising, implying that there will be more retirement years to enjoy but also more retirement years to fund.

To live a financially independent retirement period, it is necessary to have a retirement plan in place well in advance. Whether you're just getting started or have been actively pursuing your financial objectives for a while, here are some retirement mistakes to avoid — in other words, what not to do while planning for retirement –

1. Starting late

“Preparation for old age should begin not later than one’s teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement.” - Arthur E. Morgan

There are numerous retirement planning mistakes one makes, but one of the costliest is delaying starting to save.

Time is an important consideration since the more you delay saving for retirement, the less time you have to benefit from the magic of compounding. Even a few years of delay could make you lose thousands, if not hundreds of thousands, of rupees in growth.

Here's how a Rs 60,000 annual payment to a retirement plan might grow by the age of 60. Assume that the annual rate of return will remain constant at 7% during the investment period.

If you start saving at the age of 20, you will have approximately Rs 1.20 crores.

If you start saving at the age of 30, you will have approximately Rs. 56 lakhs.

If you start saving at the age of 40, you will have approximately Rs 25 lakhs.

As seen, waiting until your 40s to start saving costs you around Rs 95 lakh in growth. Even if you start saving in your 30s, you will end up with less than half of what you'd have if you started at 20. The discrepancy emphasizes on the necessity of starting early and saving for retirement continuously.

The above investment simulation, based on assumed rate of return(s), is for illustration purpose only and should not be construed as a promise on minimum returns and safeguard of capital. Union Mutual Fund is not guaranteeing or promising or forecasting any returns.

 

This leads to the second critical component of being a successful saver: taking advantage of automatic savings features, such as automatic transfers to a savings account or auto generated contributions to your retirement plan. Numerous studies have revealed that the less you have to think about saving, and the more you use technology to assist you in saving, the more money you will save.

 

2. Having no plan

“As in all successful ventures, the foundation of a good retirement is planning.” – Earl Nightingale.

A financially comfortable retirement will not happen by itself. You must devise and stick to a well-thought-out strategy. Your life expectancy, retirement location, anticipated retirement age, present lifestyle, general health, and current financial demands must all be included in the plan.

Saving without a plan is also one of the most common retirement planning blunders. A financial plan provides a road map since it demands you to set clear goals and the measures necessary to attain them. Working with a financial advisor or specialist can help you define what your plan should entail. That means you will have to answer questions such as, "How much money do you save each year?" Are you aware of any helpful retirement plans? Do you have the ability to invest additional money? How can you effectively manage your assets? These are just a few of the many questions you will have to answer.

3. Not factoring in healthcare cost

Another mistake to avoid when creating a retirement plan is failing to consider how your costs may alter as you get older. The average working-class retirement age is in their late 50s or early 60s. As you age, you may be prone to developing lifestyle-related ailments that may demand expensive treatment. This may erode your retirement funds, causing you to run out of funds sooner than planned. Creating an expected retirement budget will assist you in determining your day-to-day living expenses. However, the cost of health care, particularly long-term care, must also be considered.

Medicare will cover some medical bills but not long-term care in a nursing facility. Thinking about these expenditures in advance will help you build a plan for paying for them if you need long-term care as you age.

4. Ignoring the effects of inflation

If you are not saving or have most of your investments in risk-free assets, you will want to beat inflation, which can eat away at your retirement savings.

Inflation is the progressive price increase or the loss of buying power over time. A Rs 40 utility will likely cost considerably more when you retire in a few decades. So, when it comes to retirement planning, you want to be sure that you are keeping your purchasing power or outperforming inflation.

While safe investment vehicles like savings accounts have a role in an investment portfolio, they frequently yield lower returns compared to inflationary pressures. Savvy savers look for the best rates to get the most out of their money.

Even debt instruments, particularly lower-yielding ones, can be crushed by inflation. A broadly diversified portfolio, on the other hand, is one of the greatest assets for fighting inflation over time.

5. Inadequate investment planning

Successful retirement planning requires your attention and patience in selecting the appropriate investment plans that will help create an adequate corpus by the time you retire. Making prudent investment decisions before retiring is an important step. Choosing the best retirement plan helps in ensuring that you have a financially secure and stress-free retirement.

Some investing strategies are designed to set you up for success based on your risk tolerance and goals. A buy-and-hold strategy, for example, might work well for you if you want to purchase long-term investments.

Taking time to explore different investment strategies and options can help you figure out what works for you. You can also learn how to spot investment biases that could result in poor decision-making.

6. Saving insufficiently

Although some people begin early, they do not invest enough for their retirement goal. If you commit a conservatively low amount, you may not be able to accumulate the amount you desire for your retirement years and may need to cut costs in the future. The main cause for this low commitment is the tendency to overspend while one is younger. Another reason people underestimate the required corpus is the belief that spending would suddenly drop after retirement. Younger folks should be aware that their post-retirement expenses will be nearly identical. While some expenditures, such as commuting, may be reduced, they will be offset by increasing medical and leisure travel costs.

As a result, knowing what amount of funds you need to save for your retirement years is critical so that you can maintain your lifestyle and handle any emergency situations without worrying about money.

Make the rest of your life, best of your life!

One of the most common mistakes we make when planning for retirement is not planning, and investing carelessly. Retirement planning is a complex but critical component, especially in today's setting. As a result, it is crucial we recognize and commit to the primary financial goal of retirement planning, which is to achieve financial independence in your retirement.

 

Mutual fund investments are subject to market risks, read all scheme related documents carefully. The information in this document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipients of this material should rely on their investigations and take their own professional advice.

 

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