Retirement Planning : 5 Mistakes to Avoid..!

by Mr. Himanshu Vyapak, Reliance Capital Asset Management Ltd

Even though your retirement may be many years away, what you do today will determine how smoothly you handle your post-retirement life.

Increased life expectancy after retirement makes it important to ensure that your finances are in a good shape when you retire. This then makes it a must that you plan well in advance if you want to enjoy your retired life.

Everyone knows that this is not an easy job, especially since this is an ongoing process and financial goals are tied to lifecycle goals.

However, most of the time we only have a vague idea about what we want, which leads to many mistakes.

Here are a 5 mistakes that people make while planning for their retirement.

1. Failing to consider rate of inflation..!

When you are working, your wages generally rise as the costs of goods and services increase. Your earnings tend to keep pace with inflation, so normal inflation is not generally a big concern.

However, when you are living off savings, inflation literally robs you of your income.

Price rise or inflation can gradually minimize the value of money. What costs Rs.100 today will cost about Rs.574 in 30 years assuming inflation at 6%. In other words, the cost of living will increase due to inflation.

Most people underestimate the impact inflation will have on their retirement plans. Even at relatively low rates, inflation is a real thief of buying power over time.

2. Not changing asset allocation..!

 A person’s financial situation changes with time and on reaching important life goals 

such as retirement. It becomes critical to change one’s asset allocation (equity to debt 

or vice versa) to make investments suitable to one’s changing needs.

Shifting from equity investments to debt, while nearing retirement, is imperative. It is important to invest in the right assets. Right asset allocation is important as every asset has a different risk-return profile.

Apart from asset allocation, diversification is needed to maximize returns. One has to keep in mind that the only way to beat inflation is to have the right mix of investments, which can give good returns over the long term.

3. Delaying the planning exercise..!

For most people, retirement usually comes at the end in the list of financial goals. They start saving for it when they are near the end of their working lives. Starting early has many advantages, and by doing so, your money gets more time to grow.

Each gain generates further returns. And as time passes, you miss out on the benefit of compounding, which can grow money exponentially over time.

Also, people who don’t start saving early generally make riskier investment decisions later in life. So, start saving as soon as possible

Mr.Himanshu Vyapak,
Reliance Capital Asset Management

4. Failing to account for life expectancy..!

 Life expectancy in India has increased dramatically. As per statistics released by the Ministry of Health and Family Welfare for 2011-15, the average male life expectancy in India has risen to 67.3 years while the average female life expectancy has risen to 69.6 years.

This simply means that the number of post-retirement years without regular income is also increasing consequently.

It, therefore, becomes more critical to ensure regular income for life after retirement. This requires one’s retirement kitty to be increased not only due to longer life expectancy, but also because of old-age ailments.

According to the present standards of living, as per a conservative estimate, for 25 years after retirement (assuming retirement at the age of 60 years), you will need to build a retirement corpus of approximately Rs.4.5  crore- Rs. 5 crore.

This, if we assume 6% annual inflation and 12% returns on investments before retirement.

5. Failing to take change into account..!

 Life never moves in a straight line and change is inevitable. Any change in one’s health condition, income and external conditions will need to be incorporated into the retirement plan in order to ensure that one has enough for a comfortable retirement.

As you grow old, your physical health deteriorates. You cannot live under the expectation that medical insurance policies will take care of all your treatments. The cost of medicines and other treatments are always on the rise.

For this reason, you should know how much you can expect from your insurance provider. Account for your healthcare needs after retirement, make a separate budget and save for it.

All those who are saving for retirement or living in retirement must develop a certain level of financial skill as well so that they can make wise decisions with their assets.

They must manage their savings and withdrawals as an actuary would, invest the savings to grow and produce the necessary income, and spend those savings to produce the best value.

Even before retiring they must participate in savings plans, save the correct amount, and invest it wisely.

About the author..

Mr. Himanshu Vyapak is Deputy Chief Executive Officer at Reliance Capital Asset Management Ltd.

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