5 Financial Pitfalls to Avoid While Retirement Planning

May 23, 2022 Mutual Fund

Retirement planning entails managing your finances so that you can remain financially independent in your golden years. It is critical to begin retirement planning early in life if you want to live a carefree life of leisure after retirement.

The biggest concern of those approaching retirement is striking a balance between their current and desired lifestyle after retirement. You should be extremely cautious when it comes to retirement planning, and you should be aware that retirement also means a permanent halt to regular inflows to your account. As a result, prudent retirement planning and investment toward building an adequate retirement corpus is necessary.

When it comes to retirement planning, it is critical to practice financial discipline and create a savings plan tailored to your investing capacity and retirement goals. You should be able to enjoy your golden years free of financial limitations. As a result, retirement planning is a critical component of financial planning.

Despite working hard and saving diligently for retirement, many people have only a hazy sense of what they want after they retire, rather than a solid plan. Thus, you may make various mistakes when it comes to retirement planning. Many of you, for example, believe that whatever you save throughout your working years will be sufficient for your retirement years. But have you taken into account the devil known as inflation?

Inflationary pressure means that your savings and fixed-income investments lose buying power when the cost of goods and services rises. Inflation can have a negative impact on your standard of living, which is especially true for retirees. As a result, you should consider investing in assets that can withstand or even outperform inflation. It’s critical to make sure your finances are in order when you retire.

As a result, you must make sound financial decisions while planning for retirement and avoid several common mistakes that can negatively impact the quality of your retirement. Let’s go through the top five financial pitfalls to avoid when planning for retirement. We also discuss how these mistakes can be corrected through timely action.

1. Delay in retirement planning

Starting your retirement planning later diminishes your chances of having a sufficient retirement corpus. According to financial experts, you should start saving for retirement as soon as you have your first job. However, most of us ignore this advice and begin saving for retirement whenever it is convenient for us. Individuals in their 20s and 30s often believe retirement to be, too far away to consider. They get trapped in a web of various loan payments and EMIs, such as home loans and children’s education, and don’t have time to think about saving; this makes retirement planning a daunting task later.

Starting your retirement plan early gives your investments greater time to grow and helps you to accumulate a bigger corpus. If you start early at a young age, you can build a large corpus despite a smaller contribution. So, the ideal time to start saving and investing for retirement is as soon as you start earning.

Many of you often delay retirement planning by waiting for the right time to invest a higher salary, more disposable income, and fewer debts or responsibilities. 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. Underestimating the income required post-retirement

Many of you may have no clue about the approximate income you would need to live a financially independent life post-retirement. To make your life simpler after retirement, make a list of all your responsibilities and liabilities that you would have to take care of after you retire.

Every individual has different needs, and following any general rules can be misleading. Retirees tend to spend on different things, and considering their lifestyle, the income needed post-retirement needs to be calculated. This can then translate into annual or monthly savings figures, which you need to apportion from your income. You also have to consider the impact of taxes on your savings as well as be prepared for the negative impact of economic downturns. Being prepared in advance about these factors will help you plan your retirement budget more efficiently.

3. Fail to account for inflation rate

As explained earlier, inflation plays a major role while planning your retirement corpus. You must focus on the real rate of return on investments after adjusting the inflation rate, investment fees, and taxes instead of the nominal return.

Ignoring inflation means you will save much less than what you will need years down the line. What you spend every month in your 30s will not be the same in your 60s. You have to invest in such a way that you beat inflation, that is, earn returns that are at least a couple of percentage points higher than the inflation rate.

A higher nominal rate of return signifies greater long-term wealth creation. However, other factors, most notably inflation, can reduce your real returns. Considering inflation while retirement planning will not only tell you how much money you need to save, but it will also assist you in choosing the best investment strategy. Despite rising prices, it might help you retain your existing lifestyle during your retirement years. If the rate of inflation is larger than the return on investments after adjusting for expenses and taxes, you should save more. As a result, inflation is an important consideration in retirement planning.

4. Not planning for healthcare expenses

Healthcare costs are an area of retirement planning that is often overlooked. A wide range of medical conditions and ailments accompany old age. As a result, healthcare costs must be carefully considered in order to minimise unexpected bills after retirement.

Keeping good health in today’s fast-paced world can be a difficult undertaking. As you get older, your health-related risks increase, as do your medical costs. In order to avoid such circumstances where you break your savings early or consider borrowing for medical expenses, it is recommended to avail a health insurance plan. It will take care of uncalled medical expenses and hospitalisation during your old age.

Furthermore, it is clear that the treatment cost for severe medical conditions is quite high and can easily burn a hole in your pocket. Your health insurance plan should have adequate features to cover you against acute & critical illnesses.

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.

5. Fail to Invest wisely

Some individuals invest consistently and substantially, yet they fail to build an adequate corpus for their retirement. This is due to investing in the wrong financial instruments that cannot fulfil their retirement objectives. A balanced portfolio of equity and debt can help your investments yield potential returns.

It happens with almost every one of us that we tend to invest in a single investment tool and neglect the potential of gaining higher returns by diversifying the investments. This lack of diversification may restrain you from generating better risk-adjusted returns. When you are young, your risk-taking potential is high, and you have more time to recover in case of reverses. So, you have the privilege to increase your exposure in instruments that provide higher returns over the long term.

However, as you get old, gradually switch to lower-risk investment instruments that provide assured returns. Thus, maintaining the right balance between risk and return to achieve your retirement goal plays an important role in planning your retirement life. To develop a desirable retirement corpus, you should select worthy investment products based on your risk appetite and investment horizon. Diversification can also be defined as “not putting all of your retirement eggs in one basket.” Over time, having the correct asset mix can help smooth out investment returns.

Additionally, avoid taking out loans from your retirement fund. Retirement planning is a long-term goal, and numerous circumstances during life enhance the likelihood of using the assets saved. Hence, it is critical that your retirement assets have a lock-in period or a penalty for early withdrawal. This functions as a deterrent and helps to reduce the tendency to breach investments.

As a result, the primary goal of a retirement plan is financial independence after retirement. Avoiding the aforementioned mistakes can help you reach your objectives and enter the final phase of your life with certainty. When it comes to retirement planning, it is critical to remember that time is the most valuable asset. The more time you have to save for retirement, the easier it will be to meet your financial objectives.

Don’t put off retirement planning; instead, make the most of your time by investing in worthy inflation-beating instruments that can help you reach your desired retirement goals.

This article first appeared on PersonalFN here