10 common retirement-planning mistakes and how to avoid them

Common retirement mistakes

You have worked hard and have been putting money aside for retirement through a small monthly deduction, a fixed deposit, a SIP or more. The financial discipline is reassuring but sometimes it can be misleading. For most, building a self-sufficient life after retirement is more a hazy aspiration than a concrete plan. Saving money is only the start. But are you saving enough and for the right reasons?

Here are a few common retirement mistakes that we all should avoid:

Setting realistic goals is a pillar of smart retirement plan. Extravagant plans with limited income set you up for disappointment. Adapt your goals, do not abandon them.

Early retirement is a growing aspiration but funding it is a challenge. More years in retirement means more years of your investment sustaining you, the reason why financial planners often urge clients to review their expectations and build a bigger safety net.

We are all living longer. Many of us will spend two to three decades in retirement, which requires much more financial firepower than we think of.

The sneaky villain you have to be ready for is inflation. Inflation shrinks your retirement savings with every passing year. The Rs 1 lakh that seems plenty today could be worth a fraction in your golden years. Accounting for inflation is essential in every retirement plan even if you have been a diligent saver. It is advisable to invest in inflation-beating avenues such as equities for long-term goals like retirement.

Another mistake is neglecting to plan for the unexpected. Emergencies do not care how old you are or if you have scheduled them in your plan. Whether it is a medical event, home repair, or supporting a loved one, a dedicated emergency fund shields long-term investments from impulsive withdrawals.

Your emergency fund in retirement should at least cover six months’ worth of expenses, ideally more, given the uncertainty.

A surprisingly common slip is withdrawing from your Employees’ Provident Fund (EPF). The temptation to use the retirement fund for a dream home or a major expense is almost irresistible but financial experts warn against it. EPF is designed to safeguard your financial independence in retirement not to meet your immediate needs.

If you tap into it early, you risk hardship later. It is better to fund short-term goals with your other savings or through loans.

Next is the Public Provident Fund (PPF), an instrument often ignored in favour of flashier, higher-return products. PPF offers a rare combination of tax-free returns, solid government backing, and long-term compounding. Its income and maturity amounts are tax exempt. Even modest, regular contributions can grow into significant sums over decades. Start early, keep your account active, avoid unnecessary withdrawals and maximise this underused tool’s potential.

PPF has a lock-in period of 15 years after that one has the option of retaining maturity value without extension, however, restricting further deposits in the account.  Post maturity, one can apply for as many extensions as one wants. It is an effective tool for creating regular stream of income after retirement, as after completing 15 years one is free to withdraw every year.

Health is wealth, especially after you step away from steady employment. Medical inflation is real and healthcare costs only rise as we age.

Many people rely on employer’s group policy, forgetting that coverage usually ends when you retire or change jobs. The solution? Invest in an individual health insurance plan while you are young and healthy.

The earlier you start, the lower your premiums and the broader the coverage as family grows. Consider topping up your basic policy with a super top-up plan for added security without breaking the bank.

Fees matter more than you think. Over decades, a seemingly small difference in fund management charges or insurance policy costs can add up to lakhs lost out of your compounding returns. Always compare costs before choosing products.

Opt for low-cost mutual funds (direct plans are even cheaper), choose online insurance policies, and scrutinise every investment for hidden fees. The National Pension System (NPS) remains one of the most cost-effective options for retirement savings.

Life insurance should not be neglected. It’s not just about having any cover, but having enough. A simple thumb rule is to get a cover of at least 10-15 times your annual income, so your family’s living expenses and debts are managed if you are no longer around.

As your obligations change, for instance, after paying off loans or children becoming financially independent, revisit your coverage and adjust it accordingly.

Procrastination is a silent killer of retirement dreams. Starting early is the single biggest advantage. The magic of compounding means your money grows not just year by year but gains build on top of gains. Delay by a decade, and you will need to save much more every month to catch up. Consider this, you can accumulate Rs 10 crore by an SIP of 15,000 at the age of 25, assuming 12 percent return. Procrastinate and the SIP amount increases to Rs 1 lakh to accumulate the corpus of Rs 10 crore. If you begin late, consider working a bit longer, increase your equity allocation carefully, and optimise your existing investments for higher returns.

Asset allocation is another cornerstone. Do not play it too safe by avoiding equity altogether. While debt instruments offer stability, equity is what enables your portfolio to beat inflation over the long term. Balance equity, debt, and perhaps an exposure of around 10-15 percent to gold and silver, depending on your risk appetite and horizon. Adjust your allocation as you age, but don’t pull out of equities entirely as retirement can last as long as your working life, and growth assets will continue to matter.

Above all, be realistic. Do not expect lottery-ticket returns from your investments. The market can be generous but its performance is never guaranteed. Anchor your plan on figures you know you can achieve, adjust as you go and review your strategy regularly. It is always better to seek guidance, as financial advisers can help you sharpen your plan and avoid pitfalls.