The financial life cycle of an individual consists of different phases such as childhood, early career, peak career and retirement. Planning for these stages is crucial to combat uncertainties, and financial burden and fulfil the desired objectives. However, in this planning, investors usually make some mistakes, which can further delay their desired results. Therefore, recognising these hurdles and planning for them accurately is crucial.
The retirement period is full of medical, societal and financial uncertainties. Therefore, its planning becomes utmost crucial. However, nearly 31% of urban Indians are unclear about retirement planning. Such lack of clarity leads to individuals making some common retirement mistakes. Let’s explore the 5 mistakes and ways to avoid them.
Retirement planning
Individuals work for their whole lives to ensure that they fulfil their desired objectives and responsibilities and attain a stable financial level. However, some uncertain incidents and expenses in their retirement can wipe out their savings. Therefore, investing is a significant element of retirement planning.
How to prepare a retirement plan?
Inflation, medical emergencies, debt, estate requirements, responsibilities, etc., can burden the retirement period. However, individuals are usually in a dilemma about how to prepare for retirement uncertainties. Let’s explore some ways of retirement planning.
- Determine your basic lifestyle expenses during retirement and the risks affecting them.
- Plan your retirement income source through different investment instruments.
- Seek suitability with investment instruments, such as annuity schemes, insurance, fixed-income instruments, etc.
- Allocate a fixed part of your present salary (any income source) for this retirement investment.
The financial goals for retirement can be easily attained if an investor starts early. However, in this process, investors usually make some common retirement mistakes. Avoiding this can smoothen an investor’s financial journey post-retirement.
Avoid these common retirement mistakes!
Among many hurdles, these 5 mistakes make the most impact on an investor’s retirement finances.
- Not starting early
Individuals usually neglect retirement finances with the rationale that it is quite far. However, this attitude leads to missing crucial money-making opportunities and compounding benefits. Early investing doesn’t require investing large sums. One can regularly allocate a small amount from their income to some of the following instruments:
- Public Provident Funds (PPFs)
- Mutual funds with Systematic Withdrawal Plans (SWPs)
- National Pension Scheme (NPS) and other pension funds
- Annuity plans
- Post office investment products such as NSC and Senior Citizen Savings Schemes.
- Atal Pension Yojana (APY) and so on.
Investing early in life will also provide the investments the time to compound and potentially manage the inflation risk during retirement.
Also, read Importance of Pension Plans
- Neglecting insurance investment
Medical emergencies and rising healthcare costs are common problems faced by individuals during their retirement. They lack a proper plan or provision for the same, and it either wipes out their savings or creates a debt burden. Insurance is one of the best instruments to combat this issue. One needs to pay timely premiums and receive compensation during emergencies.
There are several types of insurance, such as life insurance, health insurance, fire insurance, etc. Investors should select the suitable option among these. Usually, health insurance and life insurance are common products while planning for retirement.
- Retiring with debt
During retirement, one may not have a fixed income source like a salary. It can further their repayment capacity. Therefore, retiring with debt can be perilous. One may have long-term debts like home loans, business loans, vehicle loans, etc.
Moreover, the mortgage liability in these loans can hinder retirement finances. If not repaid, these debts may also be shifted to the next generations. Therefore, one should try repayment of debt before retiring.
- Not keeping a mixed investment approach.
Diversification is one of the basic principles of investment. When an investment is diversified, the returns and risks spread through the portfolio. Planning for retirement can be a long period. During this, several factors such as market volatility, inflation, tax implications, etc., can affect the investments. One can manage these factors with the help of diversification. Therefore, investors should not forget to diversify their investments gradually.
- Poor tax planning
Tax constitutes a significant part of the total expenses. Tax on regular income and capital gains should be managed according to the investor’s financial objectives. Investor’s income may rise, and in this process, tax slabs may also increase. Therefore, poor tax planning usually leads to heavy tax implications.
During retirement, one may not have a significant fixed income source, and high taxes may eat up their savings. Moreover, investors can spread their investments in instruments such as Equity Linked Savings Schemes (ELSS), 5-year tax-saving fixed deposits, NPS, etc., to reduce tax liability.
Must read: Invest in the Best Retirement Funds for a Secure Futures
Bottomline
Individuals retiring should make provisions for uncertain emergencies, financial burdens, medical situations, etc. While planning for retirement, one should start as early as possible, ascertain their financial objectives and risk tolerance and make suitable investments. However, investors usually make some common retirement mistakes that can hinder their process. Investors should consider these mistakes and plan accordingly.
Check this out! Ready for retirement? Learn how to decide on your retirement corpus
FAQs
- What is the biggest risk in retirement?
The retirement period is full of uncertainties and a lack of regular income. However, planning for such a period is crucial. Individuals should consider some potential risks such as medical conditions, inflation burden, tax liability, lack of stable income, etc., while making a viable retirement plan.
- What can be a regret in retirement?
One of the biggest regrets during retirement is the lack of monetary security. During this period, one may not have a stable income source, and expenses may rise due to medical conditions and inflation. If investments are not planned early, individuals may feel these burdens and regret the delay.
- Why is an insurance policy necessary?
In the retirement period or during uncertain incidents like death or medical emergency, an individual may be financially burdened. Insurance is a provision for such situations. It provides coverage for financial emergencies with the help of small premiums. Therefore, insurance policy is an integral element of retirement planning.
- How can I earn a pension in retirement?
Pension refers to a stable income source during retirement. Individuals can earn a pension during retirement by making investments in pensions. Moreover, one can invest in schemes or products that offer fixed income sources, such as senior citizen savings schemes, mutual funds, annuity plans, etc.
- Which is suitable, NPS or PPF?
NPS is a market-linked instrument and has a significant risk factor. However, PPF doesn’t offer market exposure but has a fixed lock-in period. Investors with more risk appetite can opt for NPS. However, one willing to earn a fixed income with any risk can select PPF. Therefore, selecting the best depends on the investor’s objectives.
