In my mid-thirties when I approached my father for some advice regarding my retirement planning, he gave me an extensive session on retirement planning 101.
In retrospect, I’m glad I listened well, and today, I’d like to share those pearls of wisdom with the rest of the world. I’m sure you’ll benefit from them the same way I did.
#1: Putting off retirement planning for later
The first and most common mistake that my father told me of was delaying retirement planning. And no, he wasn’t joking.
He gave me an example. There are 2 individuals – X and Y. While X had begun saving for his retirement from day one, Y had put it off until a decade later. At 40 Y made his first deposit into his retirement fund. X had invested around Rs. 1,000 each month diligently for 40 years. But Y, coming in late to the party, decided to compensate for his delay by investing double that amount – Rs. 2,000 – for 30 years. At 70, when they retired, Y’s fund had grown to around Rs. 70 lakhs. X’s capital, on the other hand, was near Rs. 1.2 crore. The advantage that X had on his side was time.
#2: Failing to align your retirement planning with your financial goals
The second big mantra my father drove home was aligning retirement planning with financial goals. No two people have the exact same goals in life. Depending on your financial goals, your retirement planning also needs to be realigned and modified.
My father gave me a neat example to drive home this point. You see, for the sake of better understanding, let’s assume you’re 30 now. And ten years down the line, at 40, you wish to purchase your first home. The common mistake that people commit, is that they just invest in a basket of instruments and partially withdraw to pay for their house when the time comes. My father believed that making such withdrawals eventually eat into your retirement funds. And I agree. A better option would be to plan your investments in such a manner that one of them matures right when you hit 40 years of age. That way, you have a good bit of funds coming your way right in time to meet the costs of purchasing your home.
#3: Incorrectly assuming future cash flows
When you’re planning for retirement, one of the first things you’ll need to do is predict future cash flows to see how your money will grow over the years. And unless you’re very practical and realistic, the chances are that you’ll likely take an overly positive approach and assume higher returns than average. I jokingly called it the positivity syndrome. My father has a more realistic term for it – he calls it denial.
So what he said was that it’s always best to take a conservative approach and to do the math correctly. That way, you may end up with more than you expected, and that’s always a good thing.
#4: Wrongly assessing the kind of lifestyle you’ll have post-retirement
Speaking of projecting cash flows, how do you know how much to actually save for your retirement? After all, that’s the key number in retirement planning. My father gave me a simple answer to this question. Save up enough to maintain your current lifestyle. I think that’s a genius bit of advice. Of course, for my mother and him, their lifestyle choices were pretty simple then, and they’re just the same now. But at this day and age, it’s important to account for this lifestyle factor and any medical emergencies, so you don’t have to cut corners in the future.
#5: Not involving your spouse in your retirement planning
Retirement planning for a single person is largely different from retirement planning for a couple. When you’re single, you only have your own goals and dreams to consider. But for married folks, there are two people involved in the equation. It was my father who taught me that not involving your spouse in your retirement planning can be a grave financial error. And he lived by example. My mother and he discussed every aspect of their post-work life, down to the last detail. They both made compromises, of course. But my takeaway is that they were both involved in the process.
#6: Underestimating the importance of insurance
Insurance is that financial product that provides you a robust financial support in time of your need. It’s not merely a life cover; it can also be a savings instrument that rewards you with a lump sum amount or periodic payments as you enter your retirement years.
Today, there are many kinds of insurance plans in the market. Some plans offer a pure life cover, some offer a return of premium, and yet others offer add-on covers. A new age plan like the ICICI Pru Lakshya Lifelong Income plan from ICICI Prudential Life Insurance, for instance, offers a host of benefits. Features like guaranteed capital protection in the form of “Sum Assured on Maturity”, regular monthly income till the age of 99, regular additions every year to grow your wealth, and of course, a life cover to top it all, make it a holistic plan.
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