Find out how to secure your future with smart retirement planning and avoid pitfalls!
Retirement Planning – two words nobody likes to think about when they are young and thriving. Everyone is focused on getting a great job (and keeping it!), investing in a dream home or car, maybe both, planning a family, travelling the world and living life to the fullest. Who spares time to think about retiring when everything is going well? There will be plenty of time to think about these things. Right?
Well, not exactly.
Retirement planning is a task that may be better if you get to it at the earliest – whether you like it or not. There is a possibility that you may end up facing some serious challenges in the future as your retirement date draws nearer and as you enter your twilight years.
Let’s illustrate some reasons why procrastination may not serve you well when it comes to retirement planning.
Why retirement planning must start from your second salary (if not the first!)
Retirement Planning Requires a Huge Change in Lifestyle: Apart from retiring from work, note that you will give up your monthly salary for good. This will likely be specifically painful if you have had a thriving career where you have skillfully climbed the corporate ladder, seen your salary grow and made concerted efforts to increase your standard of living. Post-retirement, you will need to learn how to live on a tight budget. A lot of job-related perks will go away too. Depending on your current financial status and lifestyle, a downgrade in spending habits will take a fair bit of getting used to.
No More Job: No job means no more income. This will be one of the biggest challenges you will likely face in your retirement because you may not be able to afford to live off your savings forever. Once you spend all your money, what do you do then? You could possibly work part-time (if such opportunities are available), but that could be counter-productive since you are mainly retiring because you don’t want to work anymore. So, until your money runs out, would it not make sense to enjoy your time without worrying about working? Probably.
Mitigating Loneliness and Having Too Much Time on Hand: Did you ever consider that you may also need to choose how to spend your time in retirement? You might discover that all the memories from the past that make life worth living, especially if you are someone who enjoyed the work you did – leave you with a significant hole to fill. Loneliness, anxiety and depression are often reported among those who don’t find a purpose in retirement. If retirement planning is not executed well, you might end up losing the only thing that matters: your happiness.
You May Need to Worry About Healthcare Costs: Now that you are retired and no longer covered by employer-sponsored health insurance, you will need to pay for your own healthcare (or get it through a private insurer). This will keep adding up while the number of chronic diseases and everyday health pills also increase. Not only will you be spending money on medication and treatment, but the doctor’s bills may also chip away at your savings for minor ailments from which you don’t recover easily at this age.
You Might Need to Worry About Proper Care: If you think that, because you are retired and all grown up, you don’t require the kind of attention and care you did when you were younger, then think again! Retirement does not mean that you are no longer reliant on others. And, if you do not have a family who is taking care of you at home, you might need to move into assisted living quarters or even go through the ordeal of living in an old people’s home.
Your Family Might Grow Apart: This is a bitter pill to swallow, but that said, it is true nevertheless. Retirement is also the time when your children start to strike out on their own, get married and start families. This means they will have less time for you since they are now busy caring for their family. Their commitments may limit your engagement even if they make time for you.
As uncomfortable as it may seem, you need to be prudent about retirement planning early on in your career when your income streams are robust and you are able to look ahead without feeling overly pressured or sentimental. And more importantly, don’t make these common retirement planning mistakes that most folks make while thinking ahead.
Here are some expensive mistakes that can cause late-stage retirement blues!
Starting Too Late
Compounding is often referred to as the 8th wonder of the world, and for a good reason. If you save a considerable portion of your monthly income and set it aside in the right investments, your money will compound and build a sizable safety blanket for you to fall back on.
For instance, if you save Rs 10,000 per month for 10 years and secure the same in an investment that earns 8% p.a., you will have a corpus of Rs 18,29,460 at the end of the decade. However, if you save the same amount for 20 years, the amount you look at will balloon to Rs 58,90,204. That’s 3X returns if the investing period is simply doubled.
Not Diversifying Your Investment Portfolio
You should allocate a certain percentage of your retirement corpus to safe investments such as FDs and bank deposits, equity-linked savings schemes, etc. Put another portion into debt mutual funds so that you are able to generate a certain amount of passive fixed income. At the same time, your equity investments take care of wealth generation and growth. The prospect of a regular fixed income will seem a lot sweeter post-retirement.
Not Buying Growth Assets
Invest in growth assets with a higher risk profile and offer greater returns. Don’t forget to include real estate as a part of your investment portfolio. Real estate is one of those avenues that are suitable for long-term investments. They assure compounded capital appreciation and a steady rental income if you invest in the right residential or commercial property. For enthusiastic investors looking at opportunities in the real estate sector, REITs may be an elegant solution that combines capital appreciation with fixed dividend income.
Use tax-saving instruments to the hilt! Start with Section 80C of the Income Tax Act, deductions under corresponding sections of financial disclosure norms for public servants, etc. For salaried employees, try contributing as much as possible to your EPF account whenever you are offered a dearness allowance. Suppose you are self-employed or running a business. In that case, you can even explore tax-planning avenues such as setting up an HUF (Hindu Undivided Family) or BOI (Body of Individuals) to save taxes and make succession easy post-retirement.
Not Opting for Tax-Deferred Investments
Don’t forget to make the most of tax-deferred investments like PPF, NSC (National Savings Certificates), LIC (LIC Annual Premium), etc. Most of these investments compound at a fixed rate per year which can grow into a handsome amount by the end of your sunset years. However, one also has to keep a tab on the limits/cap allowed for deductions as per the income slabs.
Failing to Set Up an Emergency Fund
The last thing you want to do in the later years of your life is to find yourself in a position where you are left to scramble for resources. Ensure you provide a fair corpus of investment that should equal roughly one to two years’ worth of living expenses on an unfortunate/unfathomable life occurrence. Put these funds in liquid investments so that you have easy access to the same in your time of need.
Not Keeping Your Family in the Loop
Discuss your financial plan with your spouse and kids. This will allow you to bring your entire family on board and work together towards a shared goal.
All in all, focus on creating a solid financial plan that includes provisions for healthcare, education, emergencies and late-stage retirement needs. Seek professional help from a financial planner if you feel overwhelmed by this task.
These professionals deeply understand the various tax laws and other rules governing your savings, investments and taxation concerns. They also understand the best ways to invest in real estate or create a diversified portfolio to maximise returns post-retirement. This knowledge and their vast experience will help you secure a better future for yourself and your family.
Note: This article was originally written by Teji Mandi for Deccan Herald.