Friday, January 1, 2016

Some Common Mistakes People Make When Planning for Retirement

Focus on Dreams of Retirement 

Retirement could be some several years ahead but how you handle your finances would determine how efficiently you could manage your post-retirement life. Focusing on dreams of retirement could be the initial step, where planning and working towards your dream goals could eventually lead you there. Often there seems to be some errors which can be avoid in reaching your goal.

Refraining from creating a retirement road map

A retirement road map needs to be done in order to know what the person may want to do, how much is needed to save and how one would intend achieving their goals. The best way to map the retirement plan is to envisage what the retired years ahead would look like, which will provide an idea on how to be prepared for the same.

No knowledge on how much is needed at the time of retirement 

An individual at the age of 55 has plans of retiring at 60 and has saved around 50 lakhs for his retirement. But in order to maintain his present lifestyle for the future, he needs to have a saving of at least Rs 3 crores. Having just five years to retire with shortage of Rs 2.5 crores, he may face difficulties in the future.

Not investing early 

Mr A and Mr B had followed a disciplined process of investing and both had invested Rs 10,000 each year. But Mr B had started investing at the age of 25 and had stopped at the age of 35 while Mr A had started investing at the age of 35 and had continued till the age of 65. When both of them retired at 65, Mr B would have as much as 2.5 times the amount as Mr A inspite of him investing for only 10 years in comparison to Mr A who had invested for 30 years. This is known as the power of compounding. The effect of compounding is appreciated when adequate time is given for the money to grow. The sooner one starts saving, the earlier you can retire.

Not including the possibilities like health care expenses in retirement plan 

Medical expenses during retirement are the most common possibility which is needed to be taken in consideration. A single medical bill could drain out the savings in one go. One should ensure that some emergency funds are assigned to handle the health care expenses in old age. Post retirement, ensure on the factors of the costs of medical insurance and health care expenses and plan for retirement corpus.

Avoiding in making intelligent investment decisions 

Mr A had invested in a bank FD which offered a 9% return and though it seemed to match inflation rate, he did not check into account the impact of taxes on his returns. Being in the 30% tax bracket, his net return fell a bit over 6% less than the inflation rate. Investments can be done in company shares or equity mutual funds which would give the inflation a beating return in the long term that will help in hastening up the retirement corpus growth as well as get started with lower monthly savings. While planning for retirement, it is essential to apprehend where one would want to be, to know what one needs to do to reach their goal.


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