Retirement planning: Separating myth from reality

Retirement-planning is an essential part of working towards a secure and comfortable future. However, many prioritise near-term goals or current expenses over long-term strategizing. This mindset can result in poor financial decisions.

This article looks at some common myths about retirement-planning to help investors build a holistic investment plan.

• Table of contents

1. Busting common retirement planning myths
2. Facts about retirement planning

Busting common retirement planning myths

Starting late is okay: Many investors believe they don't need to start planning for retirement until they are closer to retirement age. This can lead to a potentially insufficient retirement corpus.

Small contributions don't matter: Some think that saving or investing small amounts isn't worthwhile. They believe that they should start their investment journey only once they have a substantial sum to set aside. However, small but consistent investments have the potential to grow significantly over time with the power of compounding. A Systematic Investment Plan (SIP) in an equity mutual fund is one such route to long-term wealth-building.

Other goals are more important: A strong plan will combine short, medium, long and very-long-term goals. Retirement planning can go hand-in-hand with allocating resources for more immediate requirements.

Traditional savings are adequate: Long-term saving avenues such as Employees' Provident Fund (EPF) and Public Provident Fund (PPF) are essential components of retirement savings. However, they prioritise capital safety over returns. Therefore, inflation may erode the value of these savings over time. Diversifying your retirement portfolio with other investment avenues such as mutual funds can provide better growth potential.

High-risk investments should be avoided: There is a misconception that retirement planning requires only low-risk investments. However, a long horizon allows investors to tap into high-risk avenues such as equity that also have a higher return potential. When investors reach closer to their retirement age, they can move their equity investments to more stable avenues such as debt mutual funds. Combining equity with debt investments to balance risk and reward potential is another option.

Investments or savings are enough: Many think that retirement planning is solely about saving money. They neglect important elements like debt management, insurance and effective estate planning. All of these are important to be retirement ready.

Facts about retirement planning

Retirement planning involves more than just setting aside money. It is about creating a financial blueprint that considers lifestyle requirements as well as unexpected expenses and healthcare costs that may increase with age. It may also include building an inheritance.

A well-rounded retirement plan should involve multiple avenues of saving and investing.

Recognising the value of early and consistent savings can help in building a suitable corpus. Awareness that retirement income should come from multiple sources, like investments, savings, pensions, and other avenues of funds such as rental income, is also important.

Understanding this can help individuals develop a flexible and strong financial plan.

Conclusion

Effective retirement planning requires understanding and action. By separating myth from facts, individuals can prepare adequately for the future. This can help them spend their retirement years without financial worry. A hands-on approach to retirement planning empowers individuals to take control of their financial destiny, making adjustments as circumstances change.

FAQs

What is the amount of money required to retire comfortably?

The amount varies based on lifestyle, location, and health, A calculator for retirement may help provide an estimate tailored to your needs, but planning should account for all living expenses plus extra for unforeseen costs. A good thumb rule is to aim for 70%-80% of your pre-retirement annual income.

What are some common retirement planning mistakes to avoid?

Starting late is a common mistake. Underestimating expenses, not investing strategically and ignoring additional post-retirement expenses such as healthcare needs are other common oversights. Awareness about retirement planning facts can help avoid these mistakes.

What are some ways to save for retirement if I don't have a lot of money?

Start small but early. Consider SIPs in mutual funds, including liquid funds and overnight funds, which can grow over time and contribute to a retirement corpus.

What are some strategies for managing healthcare costs in retirement?

Invest in a good health insurance policy early, consider additional cover for critical illnesses, and maintain a healthy lifestyle to potentially reduce future healthcare expenses.

How can I create a retirement plan which accounts for inflation and market fluctuations?

Diversify investments across asset classes and consider inflation-protected securities. Regularly review and adjust your plan to stay aligned with changing economic conditions and personal circumstances.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.