Jul 28, 2014, 08.58 AM IST | Times of India
Financial planners advise people to salt away at least 10-15% of their income for retirement every month.
While many people dream of retiring early so that they can lead a life of leisure, not many succeed in doing so. Here are the five reasons you could fail in your plans and how to avoid them.
You are not saving enough
Financial planners advise people to salt away at least 10-15% of their income for retirement every month. This would be sufficient if you want to retire at the age of 60 and need a corpus big enough to sustain you for 15-20 years in retirement. If, however, you want to quit working at the age of 50, you will need a significantly larger corpus that can sustain you for 25-30 years. This also means you need to put away a larger portion of your income for retirement planning. You will need to save 20-25% of your income if you want to retire at 50.
You are not saving in the right avenue
Safety is a big concern for those saving for retirement, but being too conservative can also pose a risk to your nest egg. A 100% debt-based retirement plan will not be able to grow at the required rate, leaving the investor with a short fall of funds at 50. We are not advocating a very large equity exposure because stocks can be risky, yet, you need to have at least 25-30% of your retirement portfolio in stocks to be able to beat inflation. The equity exposure can come down progressively as you near retirement. However, even when you stop working at 50, the equity exposure should not be below 10%.
You don’t have investing discipline
Investing requires discipline, not just for 6-8 months or a few years, but for decades. An investor who puts money in a mutual fund for five months and then misses three SIPs can bid goodbye to his dreams of retiring early. This is why the mandatory investment in the Provident Fund is an effective way to build long term savings. The money is invested even before the individual can lay his hands on it. What’s more, since the contribution is linked to the basic pay, it keeps rising year after year as the income goes up.
You often dip into savings
Every time you change your job, your retirement plan is in danger of getting derailed. This is because you have the option of withdrawing the money in the Provident Fund account or transfer it into the account with the new employer.
Young people often find it difficult to suppress the temptation to withdraw their retiral benefits when they change jobs. The sudden rush of liquidity and the heady feeling of a new job is a deadly combination and usually results in unnecessary expenses. Experts advise against dipping into the retirement savings for other expenses.
You have miscalculated your needs
You may be putting away a big slice of your income and saving in the right instruments in a disciplined manner. However, you may still miss your retirement target if you have miscalculated your needs. A lot of people don’t take inflation into account when calculating their retirement needs. If you are 30 years old and your monthly expenses are Rs 75,000, even an 8% inflation will push up your monthly expenses to Rs 3.5 lakh by the time you are 50. Factor in a realistic long-term inflation rate of 8% when you set a retirement target. Keep in mind that though many expenses, such as clothing, travel and entertainment, will come down in retirement, others such as health care will go up.
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