Retirement is often advertised as the golden age for humans. After all, it is the time when you get the most freedom and space to do what you want, relax, and pursue your hobbies and interests. However, only the presence of financial wealth can make one’s retirement years golden and stress-free.
Without financial freedom, you might have to rely on your family or dependents. As a consequence, you might also have to compromise your lifestyle. To ensure your primary source of income comes from your efforts, you have to start retirement planning.
But how does one go about retirement planning without making retirement planning mistakes? Learning from how others did it before you can help you go about the task and prevent some of the biggest retirement planning mistakes. Here are five common mistakes in retirement planning to watch out for and avoid while building your retirement fund.
5 Mistakes to Avoid in Retirement Planning
Here are the five mistakes to avoid when planning retirement:
- Thinking it's too early to start retirement planning.
If you are at the beginning of your career and in the perfect pink of health, you might think it is too early to start retirement planning. You might not even think about planning in the first place and think it is a task for your later middle-aged years. But that is one of the most cliché retirement planning mistakes to avoid.
In fact, many financial experts recommend starting retirement planning as early as possible in life. The reasoning behind this is that the more time you have, the more time your money has to save, invest, and multiply.
- Not living by the save first, spend later rule.
In retirement planning for beginners or the advanced, the first step remains the same, and that is saving a portion of your income. In your initial years of earning, saving money might not seem fun, and you might want to pamper yourself. But the financially wise always get around to saving as early as possible.
Saving money helps you identify your goals, separate your needs from wants, and lays the foundation for consistent investing. If you don’t make it a point to save first and spend later every month, you can end up exhausting your monetary reserve. Many financial gurus suggest following the standard 50-30-20 rule.
Here, you spend 50% of your income on duties, bills, and responsibilities, save 30% for your needs and use 20% for your leisurely requirements. However, everyone’s financial preferences are different and only you know what percentage of saving will work best for your needs.
- Not striking a balance between over-diversification and under-diversification of assets.
One of the biggest retirement planning mistakes is to get complacent with your money and only rely on your savings to get you through different life stages, including retirement. While saving a part of your annual earnings is essential to get you started on your retirement journey, the money accumulated through it is not enough to sustain your lifestyle needs after your working years.
To live how you desire even when your primary income stops coming in, you need to ensure your secondary income is enough. And the only way you can grow your income manifold is through sensible and consistent investment.
You need to invest in a mix of market-linked and non-market-linked investments so that you can balance out the risk factor yet tap into equity and the power of compounding. Through a balance of equity and non-equity investments, your money can grow while remaining safe from extreme market fluctuations.
- Not factoring in the effect of inflation on the retirement fund.
One of the biggest mistakes to avoid while planning for retirement is not factoring in the effect of inflation on your income, savings, and investments. Inflation, by strict definition, is the continuous rise in the cost of goods, services, and amenities. Every year, the cost of various goods and services across various sectors like education, healthcare, housing, travel, utilities, gold, entertainment, retail, and others increase by varying margins.
For instance, if the cost of an educational course in law at a public law college was ₹10,000 in the year 2000, its cost today could be ₹30,000. That’s how inflation works. In the same way, all the profits you earn through your retirement savings and investments can get nullified if you don’t factor in the inflation rate in the year of your retirement. Your savings and investments should grow at an interest rate that surpasses the present inflation rate at the time you encash the retirement funds.
- Forgetting to factor in healthcare expenses.
When you step into your golden years, you unlock the boons of retirement – free time, leisure and relaxation, space to pursue your hobbies, and energy to enjoy with your loved ones. However, the average retirement age (between 55-65 years) also means you might get exposed to ailments and health complications that arise with that age.
When you are planning for retirement, it is easy to overlook some or the other crucial factor. Keeping these points in mind can help you stay away from making avoidable mistakes in retirement planning. Remember that retirement planning is a continuous process and is not something you can accomplish in a short burst of motivation and timeframe.