Retirement Planning – Common Pitfalls to Avoid
There have been numerous write-ups which you will come across the web on ‘Retirement Planning’. The discussion points are generally why it is imperative to do the retirement planning, how much corpus you will require for your post-retirement life, what will be the impact of the inflation by the time you retire, which investment instruments you should opt for to plan for retirement, what percentage should be invested in equity/debt, is my Provident Fund enough to suffice my needs post-retirement etc to name a few.
We need to understand the fact that irrespective of whichever profession you belong to, we will eventually retire one day and we cannot escape our post-retirement years which will be minus any substantial inflow of income per month. There will be more outflows than inflows. It is a phase of life which everyone will go through and we as individuals are no exceptions. Most of us dream of an early retirement or may have expressed such a desire to our close family/friends. Some of us want to retire early to pursue interests post-retirement – it may be photography, bird watching, traveling the world, establish your own business to name a few. Demanding private sector jobs, fear of layoffs, balancing home and personal commitments well, taking care of kids, unhealthy eating habits, less time for exercise, off and on medical problems takes a substantial toll on our body 15-20 years into our professional lives. This may not apply to all individuals but there is a sizable middle-class population with such a desire.
Retirement planning is not at all seen as a goal by the time we join our professional life. ‘I have just started earning and you are talking about retirement?’ is the most common question put forward to you. In mid to late 20’s we take a home and/or a car loan and sizable amount of salary goes into paying EMI. Paying the EMI and finishing off the different loans is the only and the ultimate goal. Inbetween some agent/advisor sells you a traditional insurance policy and the majority of your investible amount gets diverted to such a low returns yielding investments.
In the late 20’s and early 30’s, once you get married, personal commitments and subsequently, kids responsibilities take the priority. By the time you are in 40’s, precious 15 years or so are lost and so you lose the power of compounding to make a huge corpus. By the time you realize, you are already into your late 40’s and then you try to invest big amount towards retirement planning but with relatively fewer years of compounding remaining, the corpus is way below than what you will eventually require.
Let’s look at some of the loopholes we must avoid around retirement planning:
Not starting early enough – Compounding is the 8th wonder of the world. Earlier you start investing towards retirement, early you will be able to retire. Start with a small amount if you don’t have enough investible surplus for this goal but it is important to start early and then increase the allocation towards this goal as your salary increases. Some investors don’t take retirement as a goal as they feel it is too early to plan for it.
1 Crore 25-30 years down the line is enough for my retirement – Thanks to inflation, the value of 1 crore will be way less than what it is today. Deciding on a random figure for retirement without factoring in inflation is a big mistake lot of investors do. Make sure you do a proper goal-based planning in accordance with your age, risk profile.
Depending solely on the provident fund or real estate for retirement corpus – Some investors solely depend on Provident Fund corpus to meet their post-retirement needs. PF may not be able to generate substantial corpus in line with end corpus you will require. PF is a significant contributor to your retirement corpus but can’t be the sole contributor. So make sure you have an equity allocation along with PF while planning for your retirement. Make sure you transfer your PF corpus once you change your employer and not to redeem it. Transfer of PF amount is must simpler now than what it was a few years back.
Real estate will come handy during your retirement years but you must understand that it has associated expense with it like property tax, maintenance charges etc which you will need to give post-retirement also. Also, you can’t sell a portion of your real estate and is highly illiquid. So plan accordingly.
Utilizing retirement corpus midway for other financial requirements – As part of goal-based investing, we must make sure that we assign names to each of our investments so that we don’t redeem our corpus midway for some other financial need or luxury, thus disrupting the power of compounding midway. Investing for retirement normally spans for 30-35 years and is a long long commitment to invest regularly. Maintain the discipline to invest and monitor your investments for such a long time frame is absolutely challenging as an investor. Stay the full course.
Undermining medical costs post-retirement – With an ever-increasing medical cost every year and sorry state of government medical facilities, medical inflation is a bigger headache than the normal inflation. Every individual must not undermine the medical expenditure post-retirement and should keep an adequate provision for the same.
Taking otherwise avoidable loans during working years – In the age of credit cards and easy EMI based consumer loans, buying consumer discretionary things which you can easily avoid must be evaluated. Such an amount must go towards your investments via Systematic Investment Plans (SIP). Make sure everytime you are about to buy a reasonable big ticket item on easy EMI options which may not be absolutely necessary, just re-think again.
Retirement without pension for private sector employees – If you are working in a private sector, one must realize the fact that our retirement will be minus any kind of pension unlike our our parents and grandparents. Just think for a minute and we will realize how big a problem it is if you haven’t planned for your retirement till date.
As an investor, we must make sure that we realize the significance of retirement planning so that we are financially independent post-retirement also. Depending financially on your kids or family may not be something which you may want post-retirement. So make sure you realize it as a significant life goal, give it due importance and plan accordingly.
Have you planned/not planned for your retirement? Please share your experience/suggestion below much to the benefit of our readers.
Disclaimer: Above article is for investor education purpose only. This article is based on my experience with equity investing. There is no recommendation here for any financial product. Please consult your financial advisor before taking any financial decision. Mutual Fund investments are subject to market risks, read all scheme related document carefully before investing.