4 mistakes to avoid while planning for retirement

What are the mistakes you should avoid when you plan for your retirement ?

When one thinks of retirement, one envisages a good carefree life at a far away retirement house without the everyday hassles of going to work. In reality, its anything but that. With that monthly pay packet no longer being available, one needs to live off his retirement corpus.

Accumulating this corpus is one of the most important financial goals for everyone. Let’s quickly check on some mistakes you want to avoid when planning for your retirement.

1. Starting too late

Every basic exercise of building wealth rests on the theory of power of compounding over a period of time. Money invested for a long period of time will result into a larger corpus than money invested for a shorter duration, given the same rate of return.

If you are in your 20s, start putting away money for retirement now – its going to be swell money by the time you turn 60. If you have started saving and investing too late in your life, then you need to rack up a larger amount each month/year to build the retirement nest egg.

2. Not investing in equity

Retirement is a long term goal in one’s life. If you were to start in your 20s, then you are around 30+ years away from retirement and if you start in your 30s, then that figure is approximately 20+ years. Now that is a long period of time.

The best way to make money over such a long period of time is investing in equity. Investing too conservatively in debt instruments will not help combat inflation. Inflation eats your money away and reduces the purchasing power of money. In order to counter this menace, the rate of returns needs to be more than inflation. The only way to achieve that is to invest in equity via mutual funds or stocks.

3. Withdrawing from your retirement corpus

You save and invest for your retirement to build a corpus which will help you sustain your style of living after you stop bringing home the pay packet at 60. Most of us have the habit of dipping into the retirement corpus in case we need money very quickly.

Now that is a strict NO NO. All you achieve by doing that is a depleted retirement corpus that will not meet your basic goal of sustenance. In case you need money in emergency, use your emergency corpus. If you don’t have one, build it today.

But do not touch your retirement corpus at any cost.

4.  Not diversifying

If you thought you made a wise decision by investing for your retirement in equity, then you are right; however, if you put all your eggs in the same basket, you would be far from wise. Imagine what would have happened if you had loaded up only Satyam shares with the expectation that it would slowly but surely build your retirement corpus.

While investing for retirement, make sure you diversify your investments into different asset classes – equity, debt, real estate for example. Within each of these, you need to diversify as well. For example, for equity, you should invest across sectors and/or market capitalization’s.

How much you need to diversify is dependant on your current asset allocation, risk taking capacity and returns expected , among a host of other factors.

Make sure you keep in mind these four important points while you are investing for your retirement. It will help you in accumulating a fat corpus for your older days ensuring you can live peacefully without being dependant on others.