If you want to spend your sunset years in peace by having a good enough corpus that will be sufficient to support your post-retirement life, it is imperative that you avoid some of these common mistakes people make while planning their retirement.
1) Assuming expenses will go down
One of the common mistakes that people do is that they believe that post-retirement their expenses will go down. Experts believe that there may be a small reduction in expenses as one doesn't have to spend on expenses such as travelling to office, and rent (assuming you are able to own a house by the time you retire). But health expenses are expected to shoot up substantially post retirement.
Also, you may want to travel more post your retirement as you have more time in hand. So your travel expenses may actually go up after you retire. Making the right estimate for the expenses is important for the calculation of your retirement corpus. "It will be advisable to assume that your expenses will remain at the same level post retirement," says Vivek Karwa, a certified financial planner.
2) Not accounting for inflation
The demon called inflation eats into your returns so ignoring it can cost you dearly.
If you can purchase an item for Rs 100 today, then you will need Rs 761 for purchasing the same item 30 years later, assuming a rate of inflation of 7 per cent. Therefore, while calculating the retirement corpus you will have to adjust your rate of return both for pre-retirement and post-retirement years with inflation to arrive at the right figure. "Not accounting for inflation will lead to a lower corpus amount instead of the actual required and after a few years of retirement you will burn your cash reserves," says Anil Rego, CEO & founder of Right Horizons, a financial planning firm. "In short you won't be left with any money to live."
3) Delaying retirement planning
Planning for retirement is generally last on the priority list of many individuals. Starting early will help you accumulate more with less investments. If you start at the age of 20, you will be able to accumulate a corpus of Rs 3.16 crore by the time you retire at the age of 60, at a rate of return of 10 per cent per annum with a monthly investment of Rs 5,000. But if you start at the age of 30, you will need to invest Rs 13,988 monthly to achieve the same amount corpus at the same rate of return.
4) Not estimating life expectancy correctly
Life expectancy in simple terms means how long you are going to live. It is critical that you calculate your retirement corpus that will be sufficient to support you till you live. Although there is no thumb-rule for assuming the number of post-retirement years, experts believe it is advisable to calculate it on the higher side so that you don't run out of money.
5) Not investing in growth assets
With inflation hovering around 6-7 per cent, the post-inflation returns from debt assets like fixed deposits will be very low or negative at times. "Equities are one such avenue which offer higher returns in long run and that too tax free. Higher the returns, higher will be the corpus formation. Thus it is advisable to have a certain proportion of equity investments in your portfolio based on your risk profile," says Anil Rego of Right Horizons.