Financial planning for your post-retirement life is as crucial as planning for your other intermediate financial goals. The rise of nuclear families and increasing life expectancy have further increased the importance of creating a large investment corpus for the post-retirement life.
Explained below are five financial mistakes that can adversely impact your post-retirement goals.
Underestimating the size of your post-retirement corpus
One of the first mistakes that people usually make while planning for retirement is to assume a steep reduction in regular expenses after retirement.
While certain regular expenses, including daily commute, children's education expenses, etc. may reduce after retirement, the higher possibility of getting diseases and sustaining injuries in old age can lead to a sharp increase in healthcare expenses.
Not factoring in the inflation rate while estimating the size of your retirement corpus can also have serious implications. Failing to do so will increase the possibility of exhausting the entire corpus within your lifetime. Another major risk to factor in is the longevity risk, i.e., the risk of outliving your retirement corpus. As advances in healthcare and medical services are likely to increase the average life expectancy in the future, factoring in relatively shorter life expectancy may lead to insufficient retirement corpus.
Also read: Life stage financial planning: For a fulfilling retired life in your 60s
Not starting early
The easiest way to create a large retirement corpus without straining your finances is to start investing early. The more you delay investing for your retirement goals, the higher would be the chances of accumulating an inadequate corpus and/or straining your finances for other money goals in the later work-life stages.
For example, a 30-year-old can build a post-retirement corpus of Rs 1.5 crore within the next 30 years through a monthly SIP of just Rs 4,300 in equity mutual funds, assuming an annualized return of 12 percent. Whereas, for a 45-year-old, building the same corpus at the same rate of return over the next 15 years would require a monthly SIP investment of about Rs 30,000.
Refraining from investing in equities for retirement corpus
Equity as an asset class outperforms both inflation and fixed-income instruments by a wide margin over the long term. This makes equity the most suitable asset class for achieving long-term financial goals. Equity mutual funds are also more tax-friendly than most fixed-income investments, as the long-term capital gains (profits booked after one year of investment) realised from equity investment in excess of Rs 1 lakh per financial year are taxed at 10 percent.
Avoid shifting your entire post-retirement corpus to debt funds or other fixed income instruments on reaching your retirement. Once you near your retirement age, estimate your mandatory living expenses and financial goals that are due in the next seven years and redeem that amount from your post-retirement corpus for investing in fixed income instruments such as bank FDs or short-term debt funds. Continue investing the remaining retirement corpus in equity mutual funds for wealth creation.
The higher returns posted by the equity component in your post-retirement years will reduce the longevity risk and can help your retirement corpus to outlast your lifespan.
Also read:Debt investments: Build a safe portfolio by balancing risk and return as you age
Not reviewing your retirement portfolio at periodical intervals
Mutual funds with outstanding past track records cannot guarantee the same outperformance in the future. Changes in fund management style and various market-related factors can result in past outperformers remaining laggards for a long period of time.
Hence, compare the returns generated by mutual funds in your retirement portfolio with their peer funds and benchmark indices at least once in a financial quarter. Redeem the ones that consistently underperform their benchmark indices and peer funds during four consecutive financial quarters.
Not buying adequate health insurance cover
Your employer-provided group health insurance policy will cease to cover you and your family after your retirement. Simultaneously, the risk of hospitalization also tends to increase with advancing age. The only way to reduce the risk of hospitalisation expenses to your post-retirement corpus is to buy adequate health covers for yourself and your dependents. Hence, buy adequate health insurance
that covers your post-retirement years too. One should preferably buy them at a younger age to avail lower premiums and cover as many diseases as possible.