Personal Finance: Seven financial pitfalls to avoid in retirement years

The biggest mistake is not planning for retirement and investing haphazardly

Viral Bhatt | Updated on: Sunday, January 16, 2022, 12:45 PM IST


The word retirement brings with it a lot of anxiety and worry. The biggest concern of those approaching retirement is creating a balance between the life they live now as compared to the life they want to live post retirement. The biggest mistake is not planning for retirement and investing haphazardly. Here, we have listed seven financial pitfalls to avoid in retirement planning.

1. Underestimating the income needed: A majority of people have no clue about the approximate income they would need to live a financially independent life after retirement. Every individual has different needs and following general rules can be misleading. Retirees tend to spend on different things and considering their lifestyle, the income needed post-retirement needs to be calculated. This can then translate into annual or monthly savings figures.

2. Not planning for health care: In today’s fast-paced life, keeping good health is often a tedious task. With numerous ailments and medical conditions that come with old age, treatment costs will burn a hole in your pocket, forcing you to break your savings early or ask for monetary help. To avoid such circumstances, it is recommended to avail a health insurance plan that will take care of uncalled medical expenses and hospitalisation during old age.

3. All eggs in one basket: Whether it is Employee Stock Options or sheer trust in a company, most people tend to accumulate large amounts of stocks of select companies with them. They choose not to diversify because they think they know these companies well. This is a high-risk behaviour and it can diminish other investment avenues. A balanced portfolio of equity and debt can help your investments yield potential returns.

4. Easily accessible funds: Retirement planning is effective when saving starts at a young age. It is a long-term objective and during the course of life, various situations increase the chances of utilising the saved funds. Hence, such investments must have a lock-in period or a penalty for withdrawing before the due date. This acts as a deterrent and helps curb the tendency to break investments regularly.

5. Lack of Analyse-Assess-Adapt method: The world is going through a socio-economic change. Sticking to a long-term financial plan without analysing it can lead to a faltered output. A change of job, city, birth of a child, change in markets and many such factors demand an alteration in the savings pattern. With the Analyse-Assess-Adapt approach, re-examining the retirement plan once every few years helps take into account the market and lifestyle changes and make the plan more relevant.


6. Not sorting your debt: Long-term debts such as home loans, property loans, vehicle loans and payment of monthly EMIs for various long and short-term investment goals linked with child education, marriage, buying a second home, etc., will take a major chunk from your monthly income. Now, imagine such debts continuing even after you retire. Such payments will put a heavy toll on your financial health after retirement. To avoid such scenarios, make sure that you take care of all your debts before the age of retirement.

7. Ignoring inflation: Inflation is a demon that comes down hard on anyone who ignores it. Since retirement is a long-term goal, it is important to understand the impact of inflation on your financial goals. Inflation is the rate at which prices rise. It reduces purchasing power substantially. Assuming 7% 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% 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.

Bottom line

Financial independence after retirement is the fundamental objective of a retirement plan. Avoiding the above-mentioned mistakes can help you achieve your goals and walk into the last phase of your life with dignity and peace.

(The writer is the Founder of Money Mantra, a personal finance solutions firm.)


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Published on: Sunday, January 16, 2022, 12:45 PM IST