Retirement planning is a crucial yet often delayed aspect of financial planning. It ensures you have enough savings to maintain your living standard after retirement. Unfortunately, many people make mistakes while planning for their retirement, which can have severe consequences. This blog will discuss common mistakes people make while planning for retirement and how to avoid them.
One of the biggest mistakes people make while planning for retirement is not starting early enough. The earlier you start saving, the more time your money has to grow and the less you have to save each month. Starting early also allows you to take advantage of compound interest, which can significantly increase your savings. Let’s understand it with a simple example: Let’s say you start planning for retirement at age 40 and aim to have ₹75 lakhs saved by age 65. If you save ₹35,000 per month, you’ll need to save for 25 years to reach your goal. However, if you had started at age 30, you would only need to save for 15 years and could potentially save ₹21,000 per month, making it easier to reach your goal. By waiting 10 years to start planning, you’ll have to save an extra ₹14,000 per month for an additional 10 years, costing you more in the long run.
Not Having A Clear Retirement Goal
Another mistake that people make while planning for retirement is not having a clear goal in terms of how much money you need to save for your retirement. Having a specific goal helps you focus on what you need to do to achieve it. It also allows you to track your progress and make adjustments in case of any changes to your lifestyle or income. Without a clear goal, it’s easy to become disengaged and procrastinate.
Not Diversifying Your Investment Portfolio
Many people make the mistake of not diversifying their investment portfolio. Diversification helps to minimize the risk of losing all your savings in one investment. It’s essential to spread your investments across different asset classes, such as equity, bonds, and real estate. You can choose to invest in Pension Plans or Public Provident Fund (PPF) for long-term captial appreciation. Diversifying also helps ensure that you have a steady income in retirement. One of the financial products you should consider is ULIP (Unit Linked Investment Plan). ULIPs can be a valuable addition to your retirement planning portfolio. They provide a combination of insurance and investment, tax benefits, life cover, and flexibility in premium payment and fund switching. However, it’s essential to review the charges associated with the ULIP and choose one that aligns with your goals and risk tolerance.
Not Reviewing Your Investment Portfolio Regularly
Another mistake people make while planning for retirement is not regularly reviewing their investment portfolio. Your investment portfolio should be reviewed at least once a year to ensure that it aligns with your goals and risk tolerance. Reviewing your portfolio regularly also helps you identify any underperforming investments and make necessary changes. Suppose you have opted for a ULIP like Wealth Secure+ by Edelweiss Tokio Life Insurance. In that case, you can utilise the fund-switching feature to steer your investments through market conditions, as well as benefit from the top up feature and loyalty additions over time.
Not Considering The Cost Of Inflation
Many people make the mistake of not considering the cost of inflation when planning for their retirement. Let us understand with an example.
Assume you have ₹5,000 in your savings account right now. Say you get 5% interest on your savings. After a year, you will have ₹5,250 in your account. If the inflation rate is 10%, then the cost of the commodity would rise to ₹5,000 * (1 + 10%) = ₹5,500. If you earn 5% return on your savings and inflation is at 10%, then your real rate of return (after adjusting for inflation) would be 5% – 10% = -5%. This means that the purchasing power of your money has decreased by 5% in this scenario.
Unfortunately, inflation can erode the value of your savings over time, and if you don’t account for it, you may not have enough to maintain your standard of living in retirement. To combat inflation, consider investing in assets that have the potential to grow in value, such as Unit Linked Insurance Plans or ULIPs.
Relying Too Much On Life Insurance
Life insurance is a valuable financial product but relying too much on it for retirement planning can be a mistake. Life insurance is essential, but it should not be the sole focus of your retirement planning. Instead, focus on building a diversified investment portfolio that includes a mix of assets, such as stocks, bonds, and real estate. This doesn’t mean that you can eliminate a life insurance plan from your portfolio. Life insurance plays a vital role in making you future-ready. It just shouldn’t be your main reliance when considering retirement planning.
Not Considering All Your Options
One of the most common mistakes people make when planning their retirement is failing to explore all of their financial possibilities. There are several financial products available in the market today that can help with your retirement corpus, like ULIP, endowment plans, pension plans and more. There are several pros to each, which you need to carefully evaluate according to your unique lifestyle before selecting the right products for you.
Another common mistake is not having an emergency fund. Having an emergency fund is important to cover unexpected expenses and emergencies. Without an emergency fund, you may have to dip into your retirement savings, which can set your retirement plans back significantly.
Not Accounting For Healthcare Costs
Healthcare costs are a significant expense in retirement, and many people fail to account for this when planning for retirement. It’s important to factor in healthcare costs and have a plan in place to ensure that you have the necessary funds to cover these expenses. Long-term care insurance, health savings accounts and Medicare supplement plans are some options to consider.
In conclusion, retirement planning is essential to ensure that you have enough savings to maintain your standard of living after you retire. However, many people make mistakes while planning for their retirement, which can have severe consequences. By avoiding the mistakes mentioned in this blog, such as not starting early enough, not having a clear goal, not diversifying your investment portfolio, not reviewing your investment portfolio regularly, not considering the cost of inflation, and relying too much on life insurance, you can increase your chances of having a comfortable retirement.
When making a retirement portfolio, you can consider pension plans and ULIPs by Edelweiss Tokio Life Insurance. Their annuity plans offer guaranteed income for life, and some also come with life cover, so you can enjoy dual benefits of insurance and pension. Moreover, their double-advantage ULIPs like Wealth Secure+ can give your wealth a boost and offer the option of systematic withdrawals after maturity (available in the base cover option), that can help you utilize your corpus like pension after you retire. The best part you can start with a monthly investment as low as INR 3000. Visit their website today to know more and start your retirement planning on the right note.