Five mistakes that destroy retirement dreams
Everyone dreams to retire to a peaceful life when they don’t have to worry about earning money or meeting budgets. They want to do whatever their heart desires without worrying about its affordability. Yet the hard reality is that most people are not saving enough for their retirement. Many will be forced to work till they physically cannot and be constantly worried about finances. This is especially true for a country like India which does not have a social security net like in advanced countries. Here are five mistakes that destroy retirement dreams.
Not having a proper plan
In the words of Lewis Carroll “If you don’t know where you are going any road will take you there”. People do not have well thought-out plan to save for their retirement. They fail to anticipate the impact of inflation on their long term expenses. As a result they wish and pray that everything will work out fine. They realise their mistake when it’s too late. For example, if average inflation remains at 6%, a 30 year old having an expense of Rs 40,000 per month now will need Rs 1,72,000 per month when he attains the age of 60. This will be time when he will not have a job that pays a monthly salary.
Making the wrong investment choices
Everyone wants low risk and high returns. In the real world unfortunately it works a bit differently, higher the risk higher the return. Risk does not mean that one gambles their money. Seasoned investors understand the risk associated with an investment and invest only when they are comfortable with the underlying risk. A common investor however does the exact opposite. They will either take unacceptable risk or lose their money by falling prey to get rich quick schemes. The tax adjusted returns of such investments are often lower than the prevailing inflation. Instead of their money growing, they actually lose value of their money. Another mistake commonly made by investors is to confuse insurance with investment. Investing in a life insurance policy is not the good investment decision, no matter what your insurance agent says.
Poor planning for medical expenses
We seldom fall seriously ill below the age of 35 and hence fail to plan adequately for medical expenses that are more likely later in life. Young people treat their health like a credit card and make unhealthy lifestyle choices without the thought of repercussion later in life. Although medical science has made massive progress over the last few decades, healthcare has become expensive too. A health emergency can put major strain on finances and put other financial goals in jeopardy .It is always advisable to buy a personal health insurance policy at the earliest even if the Company you work for provides the same. The best time to buy any insurance is when you don’t need it.
Inadequate emergency fund
Nothing in life is permanent and emergencies may come in life. You need to switch jobs, get a medical treatment or repair your car. Not having an emergency fund means either taking loan to pay for the expense, withdrawing from your EPF, PPF savings or affecting your other financial goals to fund the emergency. Both of which can negatively impact your retirement planning. It is advisable to keep three to six months of expenses in an emergency fund.
Underestimating life expectancy
Recent advancement in medical science mean less people die from health related problem than earlier. The average life expectancy in India in 1960 was a mere 41 years, as of 2012 it is almost 68 years and rising. There are many more people who will live till the age 85 or 90 years. As a result many people run out of money during retirement and forced to do meagre work to sustain themselves. One should consider their life expectancy to be a 100 years while planning for retirement.
People usually fail to plan their retirement due to lack of financial knowledge and emotional biases in managing their own money. It’s strongly recommended to visit a financial planner to get a comprehensive financial plan made for you and your family.
This aricle was published on moneycontrol.com
