Probably the last thing on an earning young person’s mind is retirement. So why should they plan it so early when they have so much time? However, if you question a middle-aged person or someone approaching retirement, he will likely tell you that early retirement preparation would have been really beneficial. Remember that constructing a retirement portfolio entails not only selecting the appropriate investments but also avoiding costly errors. Here are a few mistakes that a youngster must avoid for a financially secure retirement.
Start saving later:
Probably the biggest adversary of building a good long-term corpus has been procrastination. Remember, at an early age you can invest more in risky assets for lofty returns, which you cannot afford once shouldered with responsibilities. If you begin saving early, the amount of money required to save for retirement will be significantly less than if you begin later. Early saving has two major benefits, i.e it requires fewer funds to invest and compounding helps tremendously.
Overdependence on Provident Fund:
Because of the mandated contributions that occur through the Employees’ Provident Fund, many young employees tend to overlook retirement preparation (EPF). Remember that EPF is a debt investment that grows at a conservative yearly rate of 8%. In order to build a large corpus, the growth rate must account for inflation over time. As a result, relying just on EPF and ignoring appropriate asset classes such as equity, which has the potential for a high inflation-adjusted return over time, may not be a wise option.
Not transferring EPF:
The EPFO’s implementation of the Universal Account Number (UAN) has made the procedure of EPF transfer considerably easier. Instead of withdrawing the EPF money, transfer it online when you move employment and allow the power of compounding to help you save for retirement. EPF contributions are deducted from your pre-tax income and constitute the debt component of your retirement portfolio.
Poor asset allocation:
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The asset classes you choose to invest in will have a significant impact on how much money you accumulate for retirement. Over the long term, studies have shown that equities can give a better inflation-adjusted real return than any other asset type, including gold, debt, and real estate. When retirement is at least 10 years away, a bigger allocation to equities, ideally through equity diversified funds, is preferable. However, the importance of debt assets in retirement planning cannot be overstated. Debt helps to preserve capital as one approaches retirement because it is less volatile. As one approaches retirement, one should begin de-risking by transferring funds from stock to less volatile debt assets.
Don’t consider 60 as retirement age:
It is becoming more difficult to retire at the age of 60 as a result of rising life expectancy and economic strain. What one earns and invests throughout one’s working years is supposed to assist in sustaining one’s nonworking years. According to recent Census of India data, men have a life expectancy of 66.6 years, while women have a life expectancy of 71. Male and female life expectancy was 48.8 years between 1970 and 1975. It demonstrates that individuals are living longer lives, making it necessary to plan for a longer period of unemployment.
Individuals tend to take up consulting employment to tide over financial problems and keep themselves engaged for a few more years after retirement if health troubles do not arise. However, not everyone would choose to continue working if there is a sufficient retirement fund.
Remember inflation is eating your money:
Even though many youngsters start saving for the future, they may not have calculated their retirement corpus needs based on actual figures. This could lead to a bumpy ride as retirement approaches. Assuming a 5% rate of inflation, the monthly income requirement balloons to over 3.5 times. As a result, instead of looking at present costs, one should save for the future after adjusting corpus with inflation.
