Retirement planning is a systematic process which you need to start at the right time, make right assumptions or else chances are high that you might fall short of your retirement goal.
If you don't want this to happen, avoid making the following mistakes-
Ignoring inflation: Not accounting for inflation is the grave mistake people make. Inflation is the rate at which prices rise. It reduces purchasing power substantially. Assuming 7 per cent inflation, Rs 1,00,000 today will be worth Rs 13,000 after 30 years.
In simple terms, this means that things will become costlier and years later you will be able to buy much less with the same amount of money.
Ignoring inflation means you will save much less than what you will need years down the line. If you spend Rs 50,000 every month at 30, you will need Rs 3.81 lakh a month at 60 assuming that prices rise at the rate of 7 per cent every year. You have to invest in such a way that you beat inflation, that is, earn returns that are at least a couple of percentage points above the inflation rate.
If you ignored inflation while doing the maths, revisit the numbers. Always take the real rate of return (rate of return minus inflation) while doing the calculation. Also, use a realistic rate of inflation.
"If we do not consider inflation effect while calculating the retirement corpus, we will end up calculating the corpus using the post retirement investment returns itself resulting in a smaller corpus value which will get used up in no time, and the retirees life will be messed up," says Vijayanada Prabhu, Investment Analyst at Geojit Financial Services.
Starting late: Retirement usually comes at the end in the list of financial goals of most people. They usually start saving for it when they are near the end of their working life. The focus, instead, is on intermediate goals.
You should start investing for retirement as soon as you start earning. You may start with smaller contribution initially if your finances don't permit and increase it over time but start early as sooner you start lesser you will need to save.
Assuming expenses will go down substantially: It is the common mistake that people make. They believe after retirement their expenses will half or go down substantially because they may not be paying those high equated monthly installments (EMIs) or their children's tuition fees. But what they tend to ignore is their medical expenses may go up substantially. There may be a 20-30 per cent dip in expenses but not substantial. Therefore, it is always advisable to consider higher expenses for retirement corpus calculation.
"Considering only living expenses and neglecting medical care expenses while calculating corpus is a common mistake. One should add medical care corpus also to the kitty at an inflation rate higher than normal inflation,"says Prabhu of Geojit Financial Services.
Ignoring equity: Being conservative and investing in debt instruments such as fixed deposits may not help you reach your retirement goal. You have to include equity in your portfolio to generate inflation beating return. You can start with higher allocation to equity and reduce it overtime.
Consider real rate of return: Not considering the real return while calculating the corpus is a mistake people make."During the investment stage, the money that we invest is taken from our monthly income after our expenses are met. Hence the investment amount is not subject to inflation. But after you retire, the monthly withdrawals is done from accumulated corpus which as a whole is subject to inflation," says Prabhu. Even if we invest this accumulated corpus in a safe fixed return investment, the return obtained will be eroded by inflation. The net interest rate obtained from the fixed return investment, after deducting the effect of inflation is called the real rate.