Seven financial pitfalls to avoid in retirement years

The word retirement brings with it a lot of anxiety and worry. The biggest concern for those approaching retirement is to create a balance between the life they live now versus the life they want to live after retirement. The biggest mistake is not planning for retirement and investing haphazardly. Here, we’ve listed seven financial pitfalls to avoid when planning for retirement.

1. Underestimating the income needed: Most people have no idea of ​​the approximate income they would need to live a financially independent life after retirement. Each individual has different needs and following general rules can be misleading. Retirees tend to spend on different things and considering their lifestyle, the income needed after retirement needs to be calculated. This can then translate into annual or monthly savings.

2. Not planning for health care: In today’s busy life, maintaining good health is often a tedious task. With many ailments and medical conditions that come with old age, the costs of treatment will run out of pocket, forcing you to break your savings sooner or seek monetary assistance. To avoid such circumstances, it is recommended to avail of a health insurance plan that will cover unclaimed medical expenses and hospitalization during old age.

3. All eggs in one basket: Whether it’s stock options for employees or simple trust in a company, most people tend to hoard large amounts of stock in certain companies with them. They choose not to diversify because they think they know these companies well. This is high risk behavior that may diminish other investment opportunities. A balanced portfolio of stocks and debt can help your investments generate potential returns.

4. Easily accessible funds: Retirement planning is effective when saving starts at a young age. This is a long-term goal and throughout life, various situations increase the chances of using the funds saved. Therefore, these investments must have a lock-up period or a penalty for withdrawal before the maturity date. This acts as a deterrent and helps curb the tendency to regularly break investments.

5. Absence of Analyze-Evaluate-Adapt method: The world is going through a socio-economic transformation. Sticking to a long-term financial plan without analyzing it can lead to a hesitant exit. A change of job, city, the birth of a child, a change in the market and many such factors require a change in the savings model. With the Analyze-Evaluate-Adapt approach, reviewing the retirement plan every few years makes it possible to take into account changes in the market and lifestyles and to make the plan more relevant.

6. Not sorting your debts: Long-term debts such as home loans, mortgages, car loans, and payment of monthly EMIs for various long-term and short-term investment goals related to raising children, marriage, buying a second home, etc., will take up a significant portion of your monthly income. Now imagine such debts continuing even after you retire. Such payments will weigh heavily on your financial health after retirement. To avoid such scenarios, be sure to settle all your debts before retirement age.

7. Ignore Inflation: Inflation is a demon that falls on anyone who ignores it. Since retirement is a long-term goal, it’s important to understand the impact of inflation on your financial goals. Inflation is the rate at which prices increase. This significantly reduces purchasing power. Assuming 7% inflation, Rs 1,00,000 today will be worth Rs 13,000 after 30 years. Simply put, this means things will get more expensive and years later you can buy a lot less with the same amount of money. Ignoring inflation means you’ll save far less than you’ll need years later. If you spend Rs 50,000 every month at age 30, you will need Rs 3.81 lakh per month at age 60 assuming prices rise at the rate of 7% every year. You need to invest in a way that beats inflation, which means getting returns that are at least two percentage points above the rate of inflation.

At the end of the line

Financial independence after retirement is the fundamental goal of a retirement plan. Avoiding the mistakes mentioned above can help you achieve your goals and enter the last phase of your life with dignity and peace.

(The author is the founder of Money Mantra, a personal finance solutions company.)

Posted: Sunday, January 16, 2022, 12:45 p.m. IST