The word retirement brings with it a lot of anxiety and worry. The biggest concern of those approaching retirement is creating a balance between the life they live now as compared to the life they want to live post-retirement. While the biggest mistake done is not planning for retirement and investing haphazardly; we have listed the top five financial pitfalls to avoid in retirement planning.
1. Underestimating the income needed post retirement
A majority of people have no clue about the approximate income they would need to live a financially independent life post retirement. A vague assumption is what people work around which if too high can be unachievable and if too low can lead to financial crisis later in life. Every individual has different needs and following any general rules can be misleading. Retirees tend to spend on different things and considering their lifestyle, the income needed post-retirement needs to be calculated. This can then translate into annual or monthly savings figures.
2. Underestimating Health Care Costs
This is usually an overlooked area of retirement planning. With medical insurance, people tend to overlook the rate of increase of premium every year and the ailments beyond the coverage of the policy can create a big hole in your pocket at an older age. Health care costs need to be thought over carefully to avoid unplanned expenses post retirement.
3. All eggs in one basket
Whether it is Employee Stock Options or sheer trust in a company, most people tend to accumulate large amounts of stocks of select companies with them. They choose not to diversify because they think that they know these companies well. This is a high-risk behaviour and it can diminish other investment avenues. A balanced portfolio of equity and debt can help your investments yield potential returns.
4. Easily accessible funds – What if I need the money?
Retirement planning is effective when the saving starts at a young age. It is a long-term objective and during the course of life, various situations increase the chances of utilising the saved funds. Hence, it is imperative that such investments should have a lock-in period or a penalty for withdrawing before the due date. This acts as a deterrent and helps curb the tendency to break investments regularly.
5. Lack of Analyse-Assess-Adapt method
The world is going through a socio-economic change; more now than ever before. Sticking to a long-term financial plan without analysing it can lead to a faltered output. A change of job, city, birth of a child, change in markets and many such factors demand an alteration in the savings pattern. With the Analyse-Assess-Adapt approach, re-examining the retirement plan once every few years helps take into account the market and lifestyle changes and make the plan more relevant.
Financial independence post retirement is the fundamental objective of a retirement plan. Avoiding the above-mentioned mistakes can help you achieve your goals and walk into the last phase of your life with dignity and peace.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.