12 Common Retirement Planning Mistakes And How to Avoid Them

Thinking of hanging your work boots, i.e., getting retired, can be unsettling for those who have been employed for many years. Still, for many others, it is a desirable opportunity to stop working and pursue lifelong dreams such as travelling, activism, hobbies, or spending more time with their loved ones. Whether one's retirement goals are leisurely or productive, proper planning during their working years can make their retirement years the most fulfilling and enjoyable ones.

Retirement is a period in life when you need to manage your expenses while also pursuing your aspirations. Hence, to make the most of your retirement and fulfil your obligations, it is crucial to begin financial planning at an early stage and steer clear of common mistakes, which are outlined below:

1. Thinking It Is Too Early Or Too Late to Do Retirement Planning:

Delaying in creating a retirement plan is not a wise decision because time waits for no one. It is essential to start investing at a young age to have enough time to reach retirement goals. It is worth noting that the power of compounding will allow the money invested in earlier years to appreciate more. On the other hand, saving larger amounts later in life can cause problems with family responsibilities. To maximise the benefits of c ompounding for your retirement corpus, it is crucial to start saving and investing early. Even a one-year delay can significantly impact your final retirement savings.

Similarly, if you have crossed a certain age, you need to understand that it is never too late to start saving and planning for your retirement. The attitude of "it's too late to plan, I'll deal with retirement when it comes" is not productive. Retirement is inevitable, and you can't escape it; hence, you need to prepare yourself for it as early as possible. Procrastinating can make retirement more complicated and can lead to disappointments down the road. Therefore, it is better to take action now and start planning for your retirement.

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2. Misjudging Your Post-retirement Expenses:

One of the main mistakes investors make when planning for their retirement is underestimating retirement expenses. Some retirees may plan to downsize and reduce expenses, while others may want to live extravagantly during retirement. Whichever way you are planning to spend your retirement, take note that some expenses, such as travel, dining out, etc., may decrease, while others, such as healthcare expenses, are likely to increase as you age. Estimating retirement expenses accurately can be challenging, and even using a retirement corpus calculator may not provide a perfect estimate. Hence, it is important to regularly review your retirement estimates and adjust them as needed.

3. Not Considering the Inflation:

Inflation can be a bummer in any financial plan if it is created without taking inflation into account. Hence, inflation must be considered in every retirement plan. For instance, if your household expenses are Rs 25,000 today, they would increase to about Rs 1,16,524 after 20 years after considering an inflation rate of 8%.

Another common mistake people make when estimating post-retirement expenses is overlooking the impact of inflation. Failing to account for inflation means underestimating post-retirement expenses. Furthermore, the impact of inflation will persist throughout the retirement period.

Therefore, when estimating the retirement corpus needed to cover expenses, it is essential to factor in the rising living costs due to inflation not only during the pre-retirement period but also throughout the retirement period. Neglecting inflation at either stage could lead to running out of money during retirement, even if you have years to live.

4. Completely Depending Upon Government Schemes:

Many individuals make the mistake of investing only in government-sponsored schemes and depending completely on them for their retirement corpus. While PPF (Public Provident Fund), EPF (Employees Provident Fund), and NPS (National Pension System) are some of the popular options in India for individuals to save money for their retirement, they might not be able to provide you sufficient retirement corpus when the time comes. Hence, it is advisable to consider other options for your retirement fund and contribute as much as possible to the government retirement schemes to ensure you accumulate a significant amount. Saving for retirement requires discipline, whether through mandatory deductions by employers' or through personal contributions to other retirement schemes.

5. Investing in Ready Retirement Plans:

In India, ULIPs are marketed as ready-made retirement plans. ULIPs invest in various instruments such as equity and debt funds and insurance plans. A portion of the premium amount goes towards insurance, while the rest is invested in different assets. Combining life insurance and investment is a common mistake made by individuals while planning their finances. Traditional or endowment plans and ULIPs tend to be expensive and do not serve the sole purpose of insurance, which is to cover the risk to life.

Life insurance should be bought to provide for your family in your absence, but many investors hold multiple life insurance policies in their portfolios with very little cover. To ensure adequate coverage, you should purchase a term plan that offers high coverage at low premiums. While ULIPs offer market-linked returns, traditional or endowment plans provide a return on investment equivalent to keeping your money in a savings bank account. Additionally, investors often fail to understand the features, benefits, and suitability of traditional policies and ULIPs and miss investing in other avenues that can be more effective for their life goals.

6. Not Doing the Right Asset Allocation:

Individuals prefer to invest conservatively, especially when it comes to their retirement corpus, as it will be used to cover their expenses in old age. However, it is crucial to consider the timing of conservative investments. Investing conservatively during the accumulation phase of your retirement corpus can limit the potential growth of your investment.

If you have significant time left for your retirement, you should not make the mistake of investing excessively in low-yielding assets. Most retirement funds invest in debt instruments, which offer steady but lower returns. While this may protect your principal, it can result in a loss of value over time due to inflation.

To avoid this situation, it is essential to diversify your retirement portfolio across different asset classes. This should include high-yielding assets like stocks and equity mutual funds for capital appreciation and debt for stable returns, depending on your willingness to take risks and the time remaining for your retirement goal.

By allocating a portion of your portfolio towards high-yielding assets, you can counteract the effects of inflation and benefit from the power of compounding. As you approach your retirement, it is important to review and rebalance your portfolio towards less volatile investments.

7. Not Rebalancing the Retirement Portfolio:

To keep the asset mix you desire, it is important to rebalance your portfolio periodically, such as quarterly or annually. This is especially crucial as you approach retirement and market conditions change. As you get closer to your retirement date, it is recommended that you decrease your equity exposure and increase the percentage of the debt and debt-related instruments in your portfolio.

Rebalancing the portfolio can help distribute funds across different types of funds. However, take note that debt mutual funds are not completely risk-free, and it is important to be mindful of the credit risk taken by the fund manager. Along with debt mutual funds, Bank Fixed Deposits, Bonds, Public Provident Funds (PPF), National Savings Certificate (NSC), and Senior Citizen Savings Schemes (SCSS) are some less risky financial instruments to consider. A Systematic Withdrawal Plan (SWP) can be useful for retirees to provide a regular income, and reviewing the portfolio regularly is necessary to reduce risk and optimise returns.

8. Making Withdrawals from the Retirement Portfolio:

Retirement may seem like a time to transition from work to relaxation, but it also marks the end of earning and the beginning of spending. Retirees must balance their spendings to enjoy their hard-earned savings without depleting them too quickly. Without proper planning, retirees may fear running out of money before the end of their lives.

Retirees often make the mistake of withdrawing more money from their retirement portfolio that it can sustain in the long run. This could lead to the depletion of the portfolio much earlier than expected or force major spending changes during retirement. It's better to start with a slightly modest retirement lifestyle to sustain it without drastic cutbacks. It is not advisable to withdraw more than 4% to 4.5% of your retirement fund every year. Regular monitoring of withdrawals and setting limits on annual or monthly withdrawals are essential.

9. Not Clearing Your Debts Before Retirement:

Many a times people take out loans to finance unnecessary expenses or assets that depreciate over time. Banks and credit card companies make it easy to borrow without visiting a bank. Unfortunately, many credit card users only pay the minimum amount due, which can lead to a debt trap. Some people even take out personal loans to finance extravagant foreign vacations and end up paying off the debt for years. While taking out a loan to invest in an asset is acceptable, borrowing to fund consumption should be avoided. It makes sense to create a contingency fund to avoid dipping into your retirement fund and pay off as much debt as possible before retirement.

10. Overlooking the Healthcare Expenses:

Many people overlook the fact that as they grow older, their medical expenses and annual check-up costs are likely to increase. Furthermore, there could be a need for long-term care in hospitals or care homes, which could be a significant drain on your retirement funds. A family history of illnesses such as diabetes, hypertension, or cancer can also increase your risk for these conditions. You should note that your employer may not provide medical aid after retirement. Instead of relying solely on your employer-provided health insurance policy, it is advisable that you take out an independent Senior Citizen Health Insurance Policy when you are young and healthy.

11. Not Considering the Taxation:

When preparing for retirement, you need to take into account the impact of taxes on your investments. Your actual earnings after taxes will determine the amount of money you will have to spend in your retirement years. To achieve this, it is crucial to understand the tax implications of your investment options and choose tax-efficient avenues that offer the best post-tax returns. Consider investing in tax-saving equity mutual funds if you have a high-risk tolerance and a longer time horizon, as they come with a shorter 3-year lock-in period compared to the 15-year lock-in period of the Public Provident Fund.

12. Not Counting in Your Spouse:

Many people overlook their spouse's life expectancy when planning for retirement, leaving their spouse potentially without any financial support after their death. To avoid this mistake, you should consult a physician to determine both your and your spouse's life expectancy, choose the highest life expectancy as the basis for retirement planning, and calculate the necessary retirement corpus to cover both lifetimes. By including your spouse as an individual retiree in your planning, you can ensure that they are financially supported in the event of your passing.

To conclude:

Planning for retirement is a critical aspect of our financial journey. It is essential to understand the common mistakes that people make when planning for their retirement to avoid any financial repercussions in the future. By avoiding these twelve mistakes, you can ensure a financially stable and comfortable retirement. Remember to consult financial experts and professionals, assess your financial goals and risks, and regularly review your retirement plan to make the necessary adjustments. With a well-crafted retirement plan and financial discipline, you can enjoy your golden years without any financial stress.

PersonalFN's Retire Rich is a service managed by Vivek Chaurasia and Rounaq Neroy, who are co-heads of Research. It is a do-it-yourself retirement solution that can assist you in starting to plan for your retirement and potentially creating a substantial corpus that can support you in your golden years. It is more than just a list of funds or a specific investment idea, but a comprehensive solution that covers all the necessary aspects of retirement planning.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.