Retirement Planning: Avoid these common mistakes!

Published: March 2, 2013 at 6:16 pm

Last Updated on

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?

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

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!

Do share if you found this useful
Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!)

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication.Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
  

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

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

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

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.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 Comments

  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.