The average life span of Indians has increased considerably thanks to good health care and improved living conditions. It may sound like the ideal thing but it also means that they have long twilight years and possibly more than a decade or two where they will not be earning a living due to age and health. So it is but natural that unlike the previous generations, the current generations are more aware of the need to plan for their retirement years. They no longer consider their children as their retirement fund but instead prefer to plan and create enough funds to be able to have a good life long after retirement. Unfortunately most make a few basic mistakes which could lead to disastrous results.
Common Mistakes while planning a retirement fund
- Starting late
Youth can be beguiling. It lulls one into the fallacy that there is time and the retirement fund is not an emergency. The fact remains that it is never too early to start your retirement fund; ideally it should start in your twenties. Most wait till it is a little too late and end up with insufficient funds for a good life.
- Low Estimation
Quite often it is observed that people set their retirement needs low. They may feel that their expenses will come down later in life, but they forget to make adjustments for inflation, increased leisure and medical expenses etc.
- Lack of Prioritization
Most families concentrate on their immediate and urgent needs, postponing the important retirement fund. This procrastination will eventually lead to a meager amount making the dream retirement near impossible. It may even prove difficult to take care of basic expenses as one cannot possibly predict life span.
What you need to do:
- Start early to accrue compound interest benefits
The corpus fund for retirement is created using the advantage of the compound interest. To maximize your benefits start early. If you were to start a fund say about 5 years too late, you will either end up with a fund that is more than 35% less than your target or you will need to set aside 50% more than planned , to create the desired funds. So the key mantra is start early and it is never too early.
- Take advantage of employer benefits
Firms that offer retirement benefits will generally agree to match your retirement fund contributions. If you happen to have this advantage, make it a point to contribute maximum to your retirement funds. This ensures that you succeed in creating a substantial corpus fund thanks to the compounding benefits. Another advantage of the employer plans is that your retirement fund contribution is generally deducted before the salary is given to you; this means that you are forced to be disciplined towards your current expenses.
- Create a well-rounded portfolio
Creation of the retirement fund is a long term investment goal and it should wisely reflect in your investment portfolio. It does not make sense to stick to just low return debt investments. Although a safe bet they cannot be depended upon to help create a large fund simply because the low returns are easily erasable due to inflation. It makes sense to develop a diversified portfolio that consists not only of debt investments but also equity and other high return investments to ensure growth. The latter will ensure that your funds are not affected by long term inflation. Another important factor to consider is to slowly focus towards more stable investments as the retirement approaches.
- Consider retirement expenses and inflation
Do not underestimate your monetary requirement after retirement. Expenses may come down in various aspects like work commute, children’s education etc but remember the expenses on leisure activities, medical needs and may be even assist needs will be higher. You also need to take into account the higher cost of living due to inflation.
- Remember to plan for taxation
Always keep in mind that you need to consider taxation at every stage of planning. The growth of the fund will depend on your post taxation returns. Be well aware of the post taxation affect on the products that are part of your portfolio as it will not only affect the fund creation but also your post retirement income. In the fund creation stage it is important to look for products with deferred taxation in order to provide maximum growth opportunities whereas you need to look for maximum post tax income during the retirement phase.
You never know what you may have to face during your non-earning years, so go ahead and do the maximum you can towards saving for your twilight years. Plan now for your dream post-retirement life. Do not leave it till too late.
