Top 5 Post-retirement Mistakes To Avoid

Absence of old-age security and emergence of nuclear families have increased the importance of having adequate post-retirement corpus. However, the size of your post-retirement corpus will depend on how well you manage your finances today. Here are top five retirement planning mistakes that that can hamper your post-retirement dreams:

Underestimating post-retirement corpus:
Most people tend to under-estimate their post-retirement expenses while preparing their retirement plan. They also fail to factor inflation rate, which decreases the value of money and increases the cost of goods and services in future. An under-assessment of your post-retirement expenses would make you contribute less to your post-retirement corpus. This in turn may lead you to financial crisis in your post-retirement life and force you to work during that period to meet your daily expenses. Hence, take the help of online retirement calculator to find out the monthly investment required for building adequate post-retirement corpus after taking into account conservative inflation rate and rate of returns from your post-retirement investments.

Not starting early:
We tend to ignore challenges that we may not face in near future. As a result, we start saving for retirement only after reaching 50. Starting early allows you to make the most from the power of compounding. As you start early, compounding will make money for you from the gains or interest earned on your original investment. As you remain invested for a longer period, the base of your investment will grow bigger to create a larger post-retirement corpus. For example, if you start investing for your retirement corpus at the age of 25, a monthly SIP of Rs 1,555 generating an average return of 12% will grow to Rs 1 crore in 35 years. However, if you start investing at the age of 50 years, you will need to invest Rs 43,471 per month to build the same corpus by the time you reach 60.

Ignoring medical insurance:
High rate of inflation that we are witnessing in healthcare services is expected to grow even faster in future. The advances in medical sciences coupled with longer life expectancy will also lead to increased medical cost in future. Hence, when you will reach your post-retirement life, multiple age-related ailments can dent your pocket. This may force you to redeem your post-retirement corpus faster or avail loans at higher interest rate. The only way to avoid such situation is to buy health insurance policies to cover your medical and hospitalization costs. Buy such policies as early as possible as you will have to serve waiting periods before qualifying for certain surgeries, treatments, pre-existing illness coverage, etc. Buying early will also earn you loyalty or no-claim bonus in the form of increased sum assured.

Avoiding equities:
Many make the mistake of being too conservative with their retirement portfolio and hence, keep equities away altogether, and confine their retirement investments to fixed income instruments like bank FDs, KVP, NSC, endowment policies etc. But, their rate of returns hardly beat the inflation rates. Given that planning for retirement is a long term financial goal spanning over decades, equity is the most suitable asset class for it as it beats other asset classes over the long term by a wide margin. Invest in equity mutual funds to create your retirement corpus and as you near your retirement age, steadily shift your retirement corpus from equity funds to low risk debt funds through Systematic Transfer Plan (STP).    

Not reviewing the performance of your post-retirement portfolio
Mutual fund schemes with glorious past returns can become hopeless laggards for a long time. This makes it important to review the constituents of your post-retirement portfolio at regular intervals. List down the returns registered by your mutual funds over the last 8-12 quarters and compare them with their benchmark indices and peer funds. Redeem your mutual fund(s) if they underperformed their peer funds and benchmark indices consistently for more than 3-4 quarters.

Naveen Kukreja

Guest Author Naveen Kukreja is CEO and co-founder of Paisabazaar.com. He studied engineering at Delhi College of Engineering and holds a postgraduate diploma from IIM Calcutta