Retirement plan mistakes you must avoid
If you’ve been reading these pieces, you’ll know that we are a keen follower of taking a long view when it comes to financial planning. Take retirement, for instance. It’s not something to take lightly, because it involves acute planning and we make many mistakes along the way. Here are a few common ones:
Delayed savings
One of the foremost rules of retirement planning is to start investing early. Investing money early in life means that you allow more time to let it grow. Raj Khosla, founder and managing director, Mymoneymantra, an omnichannel financial services marketplace, said, “One of the best friends for your retirement financial planning is ‘compounding interest,’ i.e., the earlier you start your savings, the better yield you will fetch.” What’s more, long-term investments in equity markets help to average investments and creating a corpus for retirement. Starting earlier also helps you make the best returns from equity-linked investment products. According to Vivek Jain, head-investments, Policybazaar.com, an online portal for insurance purchase, products that promise guaranteed returns are best given the fluctuating market scenario and low-interest-rate environment. “The rate reduction in interest on bank deposits has greatly impacted financial planning of millions of households. Some investments that guarantee returns, irrespective of the changes in market conditions and interest rates, also have an inbuilt ‘life protection’ component,” Jain said.
Lack of clarity
Confusion over your own financial goals — and being unsteady in your investment — is a big impediment to building your retirement corpus. As your income and allowances increase, so do your expenses and responsibilities. Plan to pay for big ticket expenses like higher education, home and vehicle loans, weddings etc, through short-term or liquid investments. Add to this expenditure during emergencies and you will be able to gauge how much money you would need each month post retirement. Any kind of cash flow projection requires making correct assumptions about your financial status in future based on what you have earned, saved and invested till date. Sometimes, life may throw you a curveball like a job loss — we dealt with that in a previous piece on financial planning for an emergency.
Savings not in sync with current lifestyle
Your lifestyle matters while deciding to save for retirement. While planning for retirement, you must save to maintain your current lifestyle. According to Khosla, “To ensure the current lifestyle after retirement you should create a financial plan at least 30 years in advance, factoring in your life expectancy, inflation and cash flow requirements. After retirement, your focus should be on health-related expenses and monthly expenses as most of the other financial commitments such as loan repayment, child education etc will be over by then.”
Zero legacy planning
Do you discuss your finances with your spouse? Most couples do not realise how retirement can affect their relationship, especially, in the face of zero earnings and limited investments. Also, not many understand the relevance of including their partners in their investment making decisions. This can impact your perspective regarding savings that must last for both of you in the last years of your lives.
The first step is to discuss how much you can save and invest keeping in mind your mutual goals. The concept of legacy seems far-fetched, but must be discussed and decided. Decide on what and how much you wish to set aside for your children.
Buying a life insurance policy with an adequate policy term can also be another way to leave behind a legacy for your children to cherish. “Term insurance helps you avail a high sum assured cover at a low premium. The plan pays a lump sum benefit in case of a person’s premature death or disability. Thus, it provides one cost-effective insurance against all the liabilities and ensures the family is taken care of financially even in one’s absence or incapacity,” Adhil Shetty, CEO, Bankbazaar, an online market place for financial products, said.
Personal Finance is a weekly feature that aims to provide our readers pertinent and helpful financial information.