National Pension System

Top 7 financial pitfalls to avoid while planning retirement

A balanced portfolio of equity and debt can help your investments yield potential returns.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 made is not planning for retirement and investing in haphazard manner. We have listed the top seven financial pitfalls to avoid in retirement planning.

1. Underestimating the income required 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 un-achievable 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. Not planning for healthcare

In today’s fast-paced life, keeping good health is often a tedious task. With numerous ailments and medical conditions that come with the old age, treatment costs will burn a hole in your pocket, forcing you to break your savings early or avail monetary help around. To avoid such circumstances, it is recommended to avail a health insurance plan that will take care of uncalled medical expenses and hospitalization during your old age.

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.

6. Not sorting your debt

Long-term debts such as home loans, property loans, vehicle loans, and payment of monthly EMIs for various long- and short-term investment goals linked with child education, marriage, buying second home, etc., will take a major chunk from your monthly income. Now imagine such debts continuing even after you retire. Such payments will put a heavy toll on your financial health after retirement. To avoid such scenarios, make sure that you take care of all your debts before the age of retirement.

7. Not allowing investment to grow

Several individuals plan for retirement at a very late stage in life, thereby getting only a few years for their investments to mature. Similarly, individuals do have the habit of breaking down investments to overcome financial difficulties or emergencies. To get the expected returns on your investments, it is recommended not to do partial or complete withdrawal before the maturity date, thereby helping you get the best returns.

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.

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