Retirement planning is about managing your money such that you maintain your financial independence throughout your golden years. This makes retirement planning an extremely important aspect of financial planning. However, despite earning well, people often fail to build an adequate corpus that can continue to provide them with a steady post-retirement income.
To celebrate and live a full and carefree life post-retirement, it is crucial to start planning early and avoid some common mistakes that can impact the quality of your retired life.
(1) Delaying retirement planning
Starting your retirement planning late exponentially reduces your chances of building a big retirement corpus. Starting your retirement plan early gives your investments greater time to grow and accumulate a bigger corpus. If you have more years to invest, you can build a bigger corpus despite a smaller contribution. So, the ideal time to start saving and investing for retirement is as soon as you start earning. Let us take two scenarios to understand this with the help of an example. In scenario 1, A starts at the age of 40; invests Rs 10,000 every month, i.e., a total of Rs 24 lakh till retirement (60 years); and build a corpus of Rs 1.52 crore at a return rate of 15% p.a. In scenario 2, B starts at the age of 25; invests Rs 3,000 every month till retirement (60 years), i.e., total Rs 12.6 lakh; and builds a corpus of Rs.1.95 crore at 12% annual returns.
Benefits of starting investment at an early age
|Detail|| Monthly Investment
|Total Investment||ROI||Tenure||Corpus on Retirement (Age 60)|
|Scenario 1: Investor’s age: 40 Years||10,000||Rs 24 Lakh||15% p.a.||20 years||Rs 1.52 crore|
|Scenario 2: Investor’s age: 25 Years||3,000||Rs 12.6 lakh||12% p.a.||35 years||Rs 1.95 crore|
(Note: Table only for illustrative purpose. Factors such as inflation, taxes, associated cost on investment, etc. may impact return on investment.)
Clearly, in scenario 2, B invests less than a third of what A does but remains invested for a longer period. So, despite earning a lower return rate, they manage to build a bigger retirement corpus than B.
People often delay retirement planning waiting for the right time to invest – a higher salary, more disposable income, fewer debts or responsibilities – but that right time never comes. The best time to start saving for retirement is now. Additionally, starting early gives you enough time to review your investments and realign them as per your present situation and the current inflation rate.
(2) Not accounting inflation rate
While planning your retirement corpus, focus on the real rate of return on investment after adjusting the inflation rate, investment fees, and taxes instead of the nominal return. A higher nominal rate of return indicates a higher wealth creation in the long term. But other factors, chief of which is inflation, can bring down your real returns. Inflation is the percentage increase in the price of the products over time.
Factoring in inflation while estimating your future expenses will help you build a corpus that can help you maintain your current lifestyle during your retirement years despite the increase in costs. So, if the inflation rate is higher than the return on investments after adjusting expenses and taxes, it indicates that you need to save more. This makes inflation a crucial factor in any kind of financial planning.
(3) Inadequate health insurance cover
Potential health risks increase as you grow old and so do the expenses. If you do not have a personal health plan or if it is inadequate to cover your future medical expense, even a small illness has the potential to make a significant dent in your retirement savings. Inflation in healthcare is high and you should ensure that your health cover is in sync with the prevailing health inflation rate so that you don’t fall short in future. Additionally, focus on building a corpus or emergency fund that can ensure the availability of sufficient funds to meet your medical expenses without disturbing your retirement plan.
(4) Wrong choice of investing product
Some people invest consistently and substantially, yet they fail to build an adequate corpus for their retirement. This is, in part, due to investing in the wrong financial instruments that cannot fulfil their retirement objectives. You should select investment instruments as per your age, risk appetite, income, and investment horizon to build a desirable retirement corpus.
When you are young, your risk-taking potential is high, and you have more time to recover in case of reverses. So, increase your exposure in instruments that provide higher returns over the long term, such as equities. However, as you get old, gradually switch to lower-risk investment instruments that provide assured returns. For example, you may invest in equity mutual funds or shares at an early stage in your life. When your age is close to retirement, you may prefer low-risk debt investments to earn a moderate to low rate of return. So, maintaining the right balance between risk and return to achieve your retirement goal plays an important role in planning your retirement life.
(5) Borrowing from your retirement corpus
It is extremely important to exercise financial discipline when building a retirement fund. Draw up a saving plan specific to your investment capacity and retirement goal. Use your regular income to put money against your retirement goal and spend only the leftover money. Do not commit the mistake of withdrawing from this fund as replenishing it would require a much longer time and capital.
Finally, while planning for retirement, do factor in your retirement age and life expectancy. You may not necessarily want to wait until 60 to retire, but instead, retire at 50 and pick up things that you’ve always wanted to do. Your planning for the accumulation phase should accommodate for such plans, and your corpus should be sufficient to tide you through those additional years of reduced or no additional income. Also, do not commit the mistake of carrying your debts into retirement life. Servicing debts after retirement can be financially challenging and stressful. So clear off your debts before retirement sets in.
Remember, the mantra for peaceful retirement lies in starting early.
Adhil Shetty is a guest contributor. Views expressed are personal.