The phrase "Retirement Planning" invariably conjures up images of a white haired couple sipping Pina-Coladas on glorious sunny beach! We can blame the incessant flow of advertisements for this misguided notion of what retirement planning really is.
Surveys are revealing that more and more Indians are retiring with inadequate funds to see them through their non-earning years. With long term inflation hovering around 6-7% in our country, urban life expectancy inching up steadily and the joint family system gradually breaking down, retirement planning has shot up the list of financial planning priorities over the past 5 years.
Let's explore 5 of the top retirement planning mistakes which must be avoided!
1. Not starting early
What is the best time to start planning for your retirement? The simple answer is - it was yesterday! Although we naturally tend to procrastinate planning for this goal, adopting the opposite approach would serve us well for two reasons. Firstly, the farther away your retirement is, the lower you need to contribute out of pocket. Secondly, the farther away your retirement is, the more you'll need to actually save by the time you turn 60! A 30-year-old needs to save only Rs. 14,306/month (in a 12% return instrument) to save up 5 Crores. Strangely, if he ends up delaying by just 1 year, he ends up saving 58 lakh less! That's how 'delay cost' really stacks up.
2. Saving in low return instruments for your retirement
It's ironic that we Indians prefer to save for our retirement in low return but safe asset classes - namely, PPF and traditional life insurance. Typically, the time horizon to our retirement goal will be significant. In order to fully benefit from compounding, one should opt for higher risk/ higher return instruments such as SIP's instead. The difference between saving Rs. 15,000 per month for 30 years in a PPF account (8.70%) and a SIP (12% expected return) is more than 2.75 crore!
3. Not factoring inflation into your goal calculations
Ever been lured by one of those "side of the bus" advertisements promising you a monthly income of Rs. 50,000 in your golden years? Think again. A back of the envelope calculation would reveal that a 30 year old spending Rs. 50,000/month today will be spending Rs. 380,613/ month when he turns 60 to maintain the same lifestyle! In other words, make sure you factor in a 7% inflation rate into your retirement calculations - not just for when you turn 60 but for your post-retirement years too, as inflation will continue to gnaw away at your savings even after your earning stops.
4. Drawing upon your retirement fund to fund other expenses
From our experience, this is one of the biggest retirement planning traps of all. Faced with unforeseen expenses, we are tempted to draw upon our retirement funds without fully understanding the consequences, as we feel that there are "many years to go and we can start over again". For instance, you might liquidate your small 2 lakh retirement fund without fully understanding that this 2 lakh would have grown to almost 60 lakh (at 12% per annum) over 30 years! Simple awareness is the key to avoiding this mistake.
5. Not planning at all - adopting the attitude of "My Family is my Retirement Plan" instead
Possibly the worst retirement planning mistake would be to bury your head in the sand and ignore it altogether! According to a 2011 report published by Directorate of Economics & Statistics, around 76% of the total households were home to just one married couple in urban areas. In other words, joint families are on their way out in cities. It would be unwise to depend on your children to fund 100% of your retirement expenses, however close your family ties might be. Remember that they'll be grappling with their own expenses by the time you retire, and with inflation being the way it is, these expenses won't be insignificant! Saving up small and comfortable amounts yourself over the long term will help ease the pressure off everyone.
We wish you good luck for your retirement plan!
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