Planning one’s retirement is no cakewalk. The returns on investment may be lower than what you expected. You could pick the wrong classes to learn about assets. Inflation may have risen. A number of things can add to the woes of an individual planning his golden years.
Most investors are aware of the big and apparent mistakes even if they can’t avoid them, like, saving far too less, gambling with borrowed cash, or aiming for unattainable yields. There are some not-so-obvious mistakes which people commonly make due to the lack of enough knowledge or attention.
Let’s have a look at some of them:
1. Delaying your retirement planning
A majority of investors feel that it is too early to plan for retirement. They think that such planning should begin just a few years before the retirement date. You should not commit the mistake of postponing your retirement planning. Delays would shrink the corpus accumulated at the time of retirement.
It is ideal to start planning for retirement from the moment you get your first paycheck. This will give you more time to contribute. Besides, you will have the resiliency to start contributions with a smaller amount.
2. Unplanned withdrawals
Retirement planning requires you to adopt a long-term horizon of around 20 years and more. You need to be committed towards your fund contributions. There are instances where individuals have made unplanned withdrawals from their retirement funds. More so for irrelevant purposes.
You should not treat your retirement fund as a savings bank account. This will not only prevent the money from compounding but also attract tax liability. Instead, build an emergency fund for your contingent financial requirements.
3. Miscalculating future expenses
How much do you think you will spend on – food, shelter, clothes? Many retirees fail to determine this amount. Neither do they have a distinct budget for travel, leisure or health and medicine. Expect these expenses to be approximately 65% to 85% of your pre-retirement income each year post-retirement.
All the same, expenses can vary from individual to individual, especially when it comes to health-care. Make sure to plan this out years in advance to cover all the bases.
4. Not stepping-up your retirement contributions
If available from your place of employment, it’s advisable to max out on your retirement contributions. Try to look for retirement planning investments which are tax-efficient. You can even boost your savings with certain plans that let you auto increase the amount you contribute every passing year. Plus, if you are over 50, you may be able to add up some extra savings through a catch-up contribution!
5. Failure to rebalance the portfolio
Often, retirement plans offered by employers allow you to automate your retirement contributions. Investing and forgetting tends to be the ideal strategy but not in case of planning for retirement. After starting your retirement fund contributions, you need to periodically review and rebalance the portfolio.
Rebalancing involves adjusting the portfolio allocations as per the investor’s risk profile. If you started with an allocation of 60:40 (equity: debt), then review it after say 1 year. In case the allocations have digressed to say 50:50, then bring it back to the original 60:40.
It helps to keep the portfolio’s risk profile intact. Moreover, it also ensures that your portfolio returns are on the expected lines.
As you grow older, think of the job changes, salary growth and lifestyle shifts as opportunities to re-evaluate your savings plan and contribution to your retirement.
Make sure to address these issues early and as often as you can. And, don’t forget to keep a buffer for the unexpected.