Top 5 Common Retirement Mistakes And How To Avoid Them?

“The question isn’t at what age I want to retire, It’s at what income.”

– George Foreman

• Do you dream about the day you will retire from working?
• Does the thought of having free time to do whatever you want to excite you
• Do you have a dream about your ideal retirement life?
• Have you started planning for it?

Do you know that more than 51% of Indians do not have a retirement plan?

Which group do you find yourself in? 

With anxiety and uncertainty circling around our future, planning for our retirement is the need of the hour.

It’s crucial that you know how to avoid the mistakes that you easily could overlook if you don’t take them into careful consideration. 

Before we start, would you like to discover where you are in your retirement planning?

• What are your retirement goals?
• What is your plan to achieve the said goals?
• What method of savings plan do you plan to use after retirement?
•  For how many years have you mapped out your retirement plans?
• Can your returns match with the inflation in the long run?

Now to ideate your answers further, let’s dive into the article!

Table of Contents

• Not Planning for Retirement
• Short-Sighted Health Cover Plans
• Risking Retirement Corpus to Risks of Loss
• Pension is Fixed, Life is Not:
• Real Estate as Retirement Plan:
• Failure to Manage Debt.

5 Common Retirement Mistakes You Should Avoid:

Even simple miscalculations could cost you a fortune while planning for your retirement. It’s important to stay well informed to avoid falling into pitfalls designed to trap you.

1. Not Planning for Retirement:

 The foundation for a good retirement is planning. There are two groups of people when it comes to retirement planning. 

THINKS THEY HAVE TIME:

 Guess what? They don’t. Anyone who thinks they are too young to start planning isn’t considering the positive impact early planning would have on their retirement.  

To better understand, why you need to start planning early?

Let me give you an example of Haresh and Suresh. 

Now let’s assume that both of their monthly income goes through a 10% increase each year which in turn increases their SIP investment by 10% too.

If they both plan to retire by 60,

It’s evident through the above examples, that the impact of planning early is greater than you can imagine.

THINKS THEY DON’T HAVE TIME:

Yes, it is a great advantage to start planning early. But guess what will be a great disadvantage? Never planning. That’s why it’s important to remember that “It’s better late than never.”

The ideal time to start retirement planning would be when you get your first paycheck, the next ideal time would be “NOW”.

If you are near your retirement age, you could calculate the ratio of your liquid and illiquid assets and set up a cash reserve by pooling from your existing FDs, savings, Index fund, etc…. and devise an investment strategy to yield better returns. 

This will help you sustain yourselves in your retirement years. Keep reading to discover better ways to leverage your retirement corpus. 

In the end, it’s better to plan than to end up with no prior plans.

2.) Short-Sighted Health Cover Plans: 

• Are you relying only on your employer-provided health cover policy?

•  Do you think it will help cover your medical expenses in retirement?

Many people don’t consider taking separate health insurance while under the care of their employer. They fail to consider how old age and health issues will be a big part of their retirement life.

What’s stopping them?

For example: If you are already under a high premium coverage of 25 lakhs under your employer. You might feel it’s unnecessary to individually claim policies of let’s say, a coverage of 10 lakhs. 

Solution:

In that case, you can apply for a 1 lakh coverage, and every year you could renew it with a 10% increased cover. 

Additionally, if you set aside a savings fund of, let’s say 5 lakhs, it will act as your health reserve.

It will help you with expenses meant to cover any additional cost that might not come under your policy’s treatment coverage. 

3. Risking Retirement Corpus to Risks of Loss:

• How do you plan to use your retirement corpus?

• Do you know the ways that could expose your retirement corpus to risks of loss?

There are people who invest their entire retirement corpus in private financial institutions expecting a high yield of returns. This puts their retirement corpus in enormous danger as the probability of these institutions defaulting their payments is higher.

If this stint runs into loss, they can’t even turn to employment as searching for a job at their age would be equivalent to searching for a needle in a  haystack.

Solution:

Imagine that you have a retirement corpus of, let’s say 1 crore and want to leverage your savings. So, you plan to invest 70% of your savings in an FD with an assured return of 6% every year.

 Because the FD provides you with low returns, you also plan to invest 30% of your corpus in an Index fund to earn  inflation-beating results in  long term regardless of the market volatility. 

There is a temporary risk of loss by investing in an Index fund. But it’s a calculated risk. One you can afford. In this way, you don’t put your retirement corpus into danger and also leverage it through a better option.

4.) Pension is Fixed, Life is Not:

  There are many pension policies today sold with the assurance of a guaranteed income. But predominantly, the guaranteed income is a fixed income. Income that is not  inflation-adjusted.

Relying on a fixed pension fund means that over the years, your income would not be able to cover your expenses.

Solution:

This is why it’s important to set up a savings fund [refer to my previous point] as you might be able to leverage the fund with better investment options over the years.

For example, if your retirement corpus consists of 1 crore, you can invest 70 lakhs in Fixed Income securities and invest 30 lakhs in an Index fund.

 With a safe assured return of 6% every year from your Fixed Income securities and the high chances of 12% to 15% returns from your Index fund every 7 years. 

You can invest the returns in your Fixed Income securities while keeping the initial capital in your Index fund to let it accumulate better returns every 7 years.

Now you have a working investment strategy that has  inflation-beating returns.

By having alternate options, you would be able to tackle the rising prices in this ever-changing economy and also live your retirement life without much worry.

5.) Real Estate as Retirement Plan:

Some people invest their entire retirement corpus to purchase real estate to ensure a fixed income monthly as a part of their retirement planning. What they fail to consider is that:

• Real estate produces a rental yield of 2% – 3% which is very low compared to FDs and Index funds.

• Being an illiquid asset, it’s not possible to use it for cash withdrawals in cases of emergency.

• The monthly rent might not be sufficient over the years as inflation keeps rising.

• There will be a dry period where there might not be tenants to pay rent or even tenants who might default their payments.

• There will be additional costs involved such as maintenance of the property, water tax, property tax, etc…

This is why it’s important to distribute your retirement corpus in various investment options for a better chance of a high yield of returns.

There is an additional point I want to discuss.

An obvious one but commonly people tend to overlook, it while they are retirement planning.

6.) Failure to Manage Debt.

If we carry our debts into our retirement, it’s a sure way to fall into more debt and exhaust all our financial reserves which in no way serves us. It could be the house loan or the monthly EMI’s or some capital we borrowed for credit which would eat away at all our savings and leave us struggling with only more expenses to pay. 

Solution:

It’s better we structure a timeline to pay off our debts before our retirement. For example, Let’s say, you have a house loan that needs to be paid in 20 years. But you are going to retire in 15 years. In that case, you would need to restructure your loan timeline in such a way that you are able to pay it off within 15 years. 

By managing to pay off your debts before your retirement, you are not only able to live  debt-free in your retired years but also  stress-free.

Now, take some time to  reassess your retirement plan?

• Do you have an estimated retirement corpus?

• Do you plan to take up separate health insurance?

• What kind of liquid assets do you consider for your retirement?

• How much medical reserve are you planning to set aside?

• Does your estimated corpus match with your ideal life after retirement?

Now you might be thinking about retirement planning. To ease you with the process, here is our “Retirement corpus reliability calculator.” You can easily calculate your expenses and income to determine your average retirement corpus to help you plan your retirement according to that.

It’s easier to make mistakes when you are not well informed about the different perspectives you could think of. But if you feel as if your planning might need a professional perspective to it help you better achieve your ideal result.

Holistic has got you covered. Reach out to us if you think making use of professional strategies would yield you greater results.

Register on the below link to avail our 30-min complimentary financial plan consultation and get your doubts cleared by experienced professionals.