Retirement Planning: Avoid these common mistakes!

1. Ignoring inflation after retirement! Many online calculators are guilty of this. A part of the problem stems from the over importance associated with ‘pension’ and assuming it will be a constant number during retirement.

2. Assuming expenses will go down post-retirement! A 30- or 40-year old making this assumption when retirement is still a long way away is a humongous mistake! Some expenses will go down, and some will increase and there will be new ones for sure. The least safeguard to take is calculate based on current expenses. One can get a rough idea only when retirement is 5 years or so away.

3. Taking comfort in an average inflation of 6% Yes 6% is a decent number to start with. However actual inflation is notoriously difficult to estimate. So you should use as high a number as possible. At least 8% and if possible 10%.

4. Deciding equity exposure based on risk appetite. Equity exposure should be decided by how far retirement is and how much one can save. If I can save 75% of my salary for retirement I don’t need equity at all. If can save only 20% then I would need at least 60% equity exposure. The point is, for retirement the biggest risk is the risk of inflation. So one needs adequate equity exposure to combat this risk. The second biggest risk is shying away from equity based on unfounded fear. Volatility in return leading to short-term risk of capital is unfortunately the only way to achieve inflation adjusted capital appreciation. Read More: A Step-By-Step Guide to Long Term Goal-Based Investing

5. Ignoring tax on corpus and annuity/pension. If you are in the 30% tax slab right now chances are you will be paying at least 10% as tax when you retire. Investing in EEE instruments is great for a retirement corpus. Do keep in mind rules may change. No way you can account for future changes now but  anticipation lessens the impact of the blow. If you are invested in non-EEE instruments you better factor in tax on corpus right now.

6. Assuming retirement age is fixed in stone. Never assume you are going to retire when you want to or have to. The future is uncertain. Your health is the most important investment. Ensure your fitness year-on-year and hope for the best. Of course you need to enter an age when you use a calculator. Understand that is an estimate like inflation. Remember to use the calculator every year! The road to retirement is as uncertain as how your retired life will pan out. By the way if you think staying fit is the key to good health think again. It certainly helps to stay fit. Rest is simply chaotic luck!

7.Assuming inflation will decrease after your retirement. Why? Because India will be a developed country by then! So said my grandfather I am told in the 60s! India has very few natural resources and heavily subsidizes its imports. It does not have a strong industrial economy and has a monsoon dependent agricultural economy.  Under these circumstances I see no reason inflation will get to a comfortable low single digit number. The only practical safeguard is to assume it will hover around the lowest two digit number!

8. Overestimating returns, especially post-retirement. Expecting anything more than 12% returns from equity over a long term is crazy. The same as expecting 9-10% from debt instruments often ignoring tax. Don’t assume more than 7-8% pre-tax returns post-retirement. Yes it is important to invest in equity even after retirement. However, how much you can actually invest will become clear only after you retire. So don’t factor that in your expectations. Read More: How Achievable Are Your Financial Goals?

9. It is enough to save 15% of gross-pay each month. This is a myth made popular in the US where inflation hovers around 3-4%. Of course 15% is good for a start for a 22-23 year old. Depending on when you start and other parameters you would need to save anywhere between 70-100% of your monthly expenses. This is why it is important to keep away from debt and keep your housing loan EMI as low as possible. Read More: Should You Invest For Retirement as Much as You Spend?

10. Overestimating your salary growth. It is okay to assume that you will increase your monthly investment each year. However be practical in this assumption. Also factor in other expenses.

11. Over-importance to retirement calculators. Such calculators are like a night-lamp in a dark room. You get a rough idea of what is in the room. That is all. Don’t get too comfortable. Remember to stay alert.

12. Under-importance to retirement calculators. A bunch of people on the web (thankfully small) propagate the view that inflation is a hype created by insurance and investment companies to make people buy pension plans and that the huge corpuses generated by such calculators is just humbug! Thank God mathematics is absolute. It gives results based on the numbers you enter. No hype here. If inflation has not pinched someone they are probably comatose or dead.

Remember “If you want to make God laugh just tell him your plans”.

Make your own financial plan, today!

Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based Investing

My first book is now available at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now.  The Kindle edition is only Rs. 199.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

My second book is now only Rs 199 (Kindle Rs. 99) Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template


Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

10 thoughts on “Retirement Planning: Avoid these common mistakes!

  1. Dear Pattu, well done. You hit the nail hard on it’s head. Keep hitting all of us by such articles. Clearly Math is only Math but we should check it in out favor. 🙂

    Thanks

    Ashal

  2. sir, as ashalji has rightly put it, it is a wonderful write. please keep it up.

  3. “If you want to make God laugh just tell him your plans”. Sums it up all so well 🙂

    1. For past two hours, I have read, may be around 15-20 articles on financial planning and I am able to conclude these all with this line – If you want to make God laugh just tell him your plans….

  4. Extremely good points Pattu

    All the points are well thought of ! . This kind of proves that most of the retirement planning done till date by many financial planners was more of a instant gratification exercise which makes clients feel good and in control of their retirement. Where as they are all set for huge surpirses later in life

    All the Financial Planners should read this !

    Manish

    1. Many thanks Manish. I am convinced that distribution phase planning is the most important skill set a planner should have.

Comments are closed.