The word “retirement” typically conjures up images of a worry-free existence where one has achieved all their personal and financial goals. The stresses of working for a living are a thing of the past, and you can spend the rest of your days pursuing interests or hobbies that you didn’t have time for earlier. This type of worry-free existence after retirement is possible. Still, you need to plan for it and avoid some common mistakes that can prevent you from becoming financially secure during your golden years.
In this article, we will discuss 4 common retirement planning mistakes that you must avoid.
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1. Delaying Retirement Planning
When your retirement is decades away, it is easy to assume that you can start saving for your retirement later on. But this delay in starting can have a significant impact on your ability to successfully plan for retirement.
To illustrate how starting late will impact your retirement savings, let’s take the example of two friends – Rajesh and Suresh. Rajesh began investing for retirement when he was 25 years old, while Suresh waited until 35 years.
Now let’s assume that Rajesh invests Rs. 10,000 per month till his retirement at the age of 60 years while Suresh invests Rs. 15,000 per month till he is 60 years old. If both of them managed to get average annual returns of 12% on their investments, here’s what their retirement corpus will look like when they retire at the age of 60 years:
|Retirement Corpus Comparison of Rajesh and Suresh|
|Monthly SIP Investment||₹10,000||₹15,000|
|Investment Tenure||35 years||25 years|
|Total Investment||₹42 lakh||₹45 lakh|
|Average Annual Returns||12% p.a.||12% p.a.|
|Value of Investments at the age of 60 years||₹6.29 crore||₹2.78 crore|
As you can see, because of the delay, the Rs. 2.8 crore of retirement savings collected by Suresh is significantly lower than Rajesh’s savings of Rs. 6.29 crore. This happened even though Suresh invested Rs. 3 lakh more than Rajesh.
2. Not Increasing Your Retirement Investment Allocation With Time
While starting your retirement savings late in life is not a good idea, saving Rs. 10,000 per month like Rajesh from the age of 25 years till retirement might not be possible. It can be challenging when you have just started your first job and have limited income.
One way to overcome this problem is to start with a smaller amount and increase your investment as your income increases. These regular increments to your monthly investments can help you gather a sizeable retirement corpus even if you start with a much smaller initial investment.
Let’s see how this works with an example. Suppose instead of investing Rs. 10,000 per month, Rajesh decides to start investing only Rs. 5,000 per month for retirement when he is 25 years old. Additionally, he also decides to increase his SIP investment by 10% every year from the second year onwards. Assuming average annual returns of 12% on his investment and an investment tenure of 35 years, his retirement savings at the age of 60 years will look like this:
|Initial SIP Investment||₹5,000 per month|
|Annual Increase in SIP investment||10%|
|Return on Investment||12% p.a.|
|Investment Tenure||35 years|
|Total Investment||₹56.7 lakh|
|Value of Investments at 60 years of age||₹5.6 crore|
As you can see, even though Rajesh started with a much smaller monthly investment of Rs. 5,000 per month, he would manage to accumulate a sizable Rs. 5.6 crore by the time he retires. This can be achieved only if he increases his SIP investments regularly.
3. Using Your Retirement Savings for Other Financial Obligations
As retirement savings are not required immediately, you might be tempted to dip into these savings from time to time to meet other financial obligations such as purchasing a new car, an overseas vacation, higher education of your children, etc. However, doing this will not only deplete your post-retirement savings but can also impact the long-term growth prospects of your retirement investments.
One way to prevent this from happening is to maintain a portion of your retirement savings in investments that have a long-term lock-in, such as the National Pension System (NPS). Additionally, you must have the financial discipline to maintain a dedicated retirement fund that you do not use to meet other financial obligations.
4. Not Accounting for Inflation and Increased Life Expectancy
Inflation causes things to cost more in the future, so as a general rule, expenses increase over time. Add to this that most of us are living longer, and the need for a substantial retirement corpus becomes a necessity.
To understand how inflation and increased life expectancy play a role when estimating how much you will need to save by the time you retire, let’s take an example. Suppose you plan to retire when you are 60 years old, and currently, you are 25 years old with monthly expenses of Rs. 30,000.
As a result of inflation, your monthly expenses will increase when you retire 35 years later. Even if we conservatively assume that inflation will rise at 5% p.a., your current monthly expenses of Rs. 30,000 will increase to Rs. 1.65 lakh monthly, i.e., Rs. 19.8 lakh annually at the time of your retirement.
What’s more, you have to plan for a post-retirement life of 25 to 30 years when you will have little or no income due to increased life expectancy. So the minimum retirement savings you must have to just cover monthly expenses post-retirement would look like this:
|Retirement Funds Needed for Household Expenses|
|Annual Household Expenses post-retirement||₹19.8 lakhs|
|Funds required to cover household expenses till 75 years of age, i.e., 15 years post-retirement||₹2.97 crore|
|Funds needed to cover household expenses till 80 years of age, i.e., 20 years post-retirement||₹3.96 crore|
|Funds required to cover household expenses till 85 years of age, i.e., 25 years post-retirement||₹4.95 crore|
As you can see, if you live till the age of 85 years, the minimum retirement corpus you will need just to cover your monthly expenses post-retirement is a substantial Rs. 4.95 crore. So, do not forget to account for inflation and increased life expectancy when setting your retirement savings goals.
It is commonly assumed that after you have retired, you will learn to live on less and still manage to enjoy your golden years to the fullest. But, instead of trying to control your expenses to match your retirement savings, isn’t it better to make retirement planning a priority and ensure you have enough savings to be free of money worries after you retire?