India Markets open in 22 mins

Planning For Retirement? Avoid These 5 Financial Mistakes

Adhil Shetty

Retirement planning is a continuous process which should ideally begin once you start earning. Any small or big effort made in the beginning has the potential to give you benefits during your golden years. However, a small mistake while planning for your retirement can ruin your post retirement life.

With life expectancy having improved over the years, it makes sense to be ready with a comprehensive plan that takes care of expenses and your happiness once you cross 60.

Exercise caution while planning for your retirement and avoid these common mistakes.

Not Ascertaining Post Retirement Lifestyle

The one thing that people often fail to asses is the kind of lifestyle they would like to maintain after retirement. It would certainly be different from your current lifestyle. You may have a lot of leisure time and would like to spend on things that you normally may not indulge in like vacations, visiting clubs, gifting to children and grandchildren more often etc.

If you do not build a sufficient corpus, then you may have to cut down and compromise on your lifestyle post retirement. It would be prudent to ascertain the money that you would require and start investing accordingly to build an adequate corpus. While doing this, do take into account the impact of inflation.

Delaying Your Investments

The earlier you start investing, the bigger your corpus would be. By starting early, you get more time to multiply your fund using the power of compounding return. Let’s understand this with the help of an example as mentioned below in the table:

Details Investor ‘A’ Investor ‘B’
Age of Investor 20 Years 30 Years
Investment per month (In Rs) 5000 10000
Total amount invested in 20 years Rs 24 Lakh Rs 36 Lakh
Return %(Pa) 15% 15%
Retirement Age 60 Years 60 Years
Investment Tenure 40 years 30 years
Corpus built on retirement Rs 15.70 Cr Rs 7 Cr

As shown in the table, ‘A’ started investment at the age of 20  and gets 10 years more to invest money than ‘B’ who began at age 30. Though ‘A’ invested only Rs. 5,000 per month and ‘B’ invested Rs. 10,000 per month, but ‘A’ built up a corpus of Rs 15.7 crore, while ‘B’ could create a corpus of Rs 7 crore only.

Not Buying Sufficient Health Cover

With age, you are prone to ailments and the chances of getting hospitalised is also high. Like your lifestyle, you should also ascertain your health cover according to your needs during retirement years.

People often commit this mistake by taking Health Cover as per present requirement, and fall short of adequate health cover post-retirement. With medical costs rising, it makes sense to consider inflation while deciding the cover for yourself and spouse.

For example, if a hospitalization costs you Rs5 lakh today when you are 45, it may cost you Rs 10.4 lakh after 15 years considering inflation at 5% pa. Post retirement you may find it difficult to increase the health cover, therefore, you must take adequate health cover  years in advance in line with your post retirement requirement.

Ignoring The Need for a Contingency Fund

Another mistake that people often make is discounting the importance of a contingency fund. A contingency fund has the potential to bail you out through uncalled emergencies arising due to medical reasons or job loss. Try marinating a contingency fund well in advance and invest in liquid mutual funds or Fixed Deposits for a safe and good returns.

Not Paying Off Debt Before Retirement

Entering retirement with debt is a big mistake that you must avoid. You wouldn’t like to spend your retired life being stressed about arranging funds to reduce debts. In the absence of a regular income, you may find it difficult to repay EMIs and will have to compromise on your normal lifestyle expenses to manage debt repayments. You should focus on clearing all your existing debts before retirement sets in.

Not Diversifying Investment

There is a saying ‘Don’t Put All Your Eggs in One Basket’, which implies that you should not put all your resources at one place to avoid losing everything. This applies to investments too.

If you invest in only one instrument and don’t diversify, you may end up getting lower return or expose yourself to a higher risk. You may fall short of an adequate retirement corpus or may get a negative return if the investment doesn’t perform as per expectation. Ideally investors should diversify their investments into different asset classes to minimise risk and get assured returns.

You should also avoid some other financial planning mistakes related to retirements like not reviewing your financial portfolio on a regular basis or not changing your financial management as per your age and needs. It is best to have a plan for retirement years well in advance for a stress-free life in your golden years.

The writer CEO, BankBazaar. is a leading online marketplace in India that helps consumers compare and apply for credit cardpersonal loanhome loancar loan, and insurance.