Planning for retirement remains the one of the most complex financial goals. With other financial goals, you are quite sure of the time to the financial goal and have good idea of the amount needed to achieve that goal. If you fall short, you can arrange funds from somewhere else to bridge the shortfall.
Planning for retirement does not afford you such luxury. You don’t know how long you are going to live. Hence, you don’t know upfront how many years you need to provide for. Your ability to recover from an unplanned expense goes down drastically during retirement. You have no other source to bridge the shortfall.
When you plan for your daughter’s education, you try to build a fund to meet her education expenses. It is relatively easier to make an estimate of such expenses.
When it comes to retirement planning, you plan for everything else. How do you estimate that? And you don’t even know how long you are going to live? This is what makes retirement planning so difficult.
In this post, I will discuss some of the aspects you must keep in mind while planning for retirement.
Mistake 1: Settle for a random number
I have seen a lot of people settle for a random large number as their retirement corpus. For instance, people will target a corpus of Rs 50 lacs or Rs 1 crore or Rs 2 crore for their retirement. How do they arrive at such number? Just like that. A big number should be a good number. So, no serious thought goes into it.
There are many online calculators available. You can also download excel based retirement calculator on this website. Planning for retirement is one of your most complex financial goals. You can’t rely on fancy numbers. You need some method to arrive at the required amount.
Mistake 2: Ignore inflation
Everyone complains about inflation. Surprisingly, not many account for it while calculating retirement corpus requirement. Most rely on vague mental calculations to arrive at retirement corpus.
And mental calculations go like this. My annual expenses are around Rs 6 lacs per annum. Even if I live till 90, total expenses will be around Rs 1.8 crores (30 X 6 lacs). They add a buffer of Rs 20 lacs and target Rs 2 crore as the retirement corpus.
This is a mistake many investors commit. What about inflation?
Retirements can be long. At 30 if your monthly expense is Rs 30,000, by the time your turn 60, the same will rise to ~ Rs 3 lacs (assuming inflation of 8% p.a.). By the time you turn 85, you need Rs 20.6 lacs per month to have the same purchasing power.
In my opinion, inflation and ill health are your biggest enemies during retirement. The only difference is inflation destroys your financial health slowly while ill health can destroy it swiftly.
Mistake 3: Consider yourself a super-hero
This is especially true for younger investors. They have never had a prolonged hospitalization. Hence, they cannot relate to the high cost of medical treatment. Even a minor surgery can run into a few lacs of rupees. As you grow older, even health insurance starts getting expensive.
Get practical. You will fall ill and the treatment will be expensive. You must plan.
Once you retire, you may not need life insurance. However, you will still need health insurance. Do plan for such expenses. Plan for an adequate medical emergency corpus too. Health insurance may not cover all the expenses.
Mistake 4: Touch your EPF and PPF corpus before retirement
This has more to do with investment discipline. Sometimes, we do a few things just because we can do it. You withdraw your EPF balance when you switch jobs. Why? Because you can do it. In fact, most of the times, you are in contravention of the law when you do it.
When your PPF account matures, you find ways to use that money. Why can’t you just extend you PPF Account?
Must Read: All you need to know about PPF Account
I understand your hand may be forced sometimes. However, from what I have seen, it is not. In most cases, you have a choice. And in my opinion, many investors choose the wrong option.
Both EPF and PPF fall in the EEE (Exempt-Exempt-Exempt) at least as of now. So, you are looking at favorable tax treatment for the long term. Hence, try not to withdraw before retirement.
The good part is that most of us build the corpus in EPF almost unknowingly. A part of your salary gets invested in EPF automatically. PPF remains one of the preferred choices as Section 80C investment. Hence, with EPF and PPF investments, you can build a sizeable corpus without even realizing.
Transfer of EPF balance is no longer as big a problem these days. So, you don’t have too many excuses to withdraw from your EPF account.
I am not saying you should rely solely on EPF and PPF for your retirement. You must look at other investments such as equity mutual funds too, especially if you are quite young.
Must Read: How to use PPF as a pension tool
Mistake 5: Try to be super-smart and not purchase a house
Sometimes, we can get too technical trying to figure out the best financial decision. Buy or Rent always makes for a good debate. However, such decisions look nice only in debate or on an excel sheet. Be practical. You need a house to stay after retirement. You don’t want to be worrying for rent after retirement.
I am not saying you must purchase beyond your means. Purchase an affordable house. Make purchase of a house a high priority if you are in your 30s.
Mistake 6: Delay retirement planning
Just arriving at your retirement corpus is not enough. You have got to invest to build that corpus too. And you can’t rely on your EPF and PPF corpus to fund your retirement too. Well, most can’t.
Most of us wait till the repayment of house gets over and other major life goals such as children’s education and marriage get over before we get serious about retirement planning.
You must not do that or it might get too late.
The common refrain is that you don’t have enough left to invest after home loan EMIs and regular monthly expenses. Enough excuses. You have got to figure out a way.
Do whatever you have to do. Increase your income. Reduce down discretionary expenses.
You can start small and still accumulate a large corpus. Never underestimate the power of compounding. Following two posts cover many such examples.
Must Read: Don’t get obsessed with home loan repayment
Mistake 7: Purchase annuity too early
The earlier you purchase, lower the annuity rates. Annuities can be a good option late into your retirement when your health may hamper your ability to manage wealth.
Annuities can also be useful if you feel that your spouse (dependants) won’t be able to handle the corpus if you are not around.
Must Read: Annuity Options under NPS
Mistake 8: Stay within your comfort zone and do not diversify your assets
Think beyond real estate, fixed deposits, gold and provident fund. Do consider equity mutual funds especially if your retirement is some time away.
Your inputs are vital for the health of this blog. This is certainly not a holistic list.
Do let me know in the comments section if you feel I have missed out something important.