5 ways you can go wrong with your retirement planning

Among the many excuses for delaying retirement planning is “we are eligible for pension”. Government employees who joined after 2004 are not eligible for defined benefit pensions and need to do their own retirement planning. Since their fixed contribution towards NPS won’t be enough to buy sufficient annuities, they should either increase their NPS contribution or invest in other retirement products. Matters are worse for private sector employees. Pension provided under the Employee Pension Scheme of the EPFO is meagre, the maximum one can get is just Rs 7,500 a month. The most common excuse used by youngsters is that retirement is far, far away and there's plenty of time, whereas in reality, each passing day counts towards building your corpus.

Another argument is that income will be more at a later age. While this is true, expenses will be proportionally higher too, you will have dependants or more mouths to feed, more expenses etc. Normally, children's education and wedding are major financial goals for many and these are heavy expenses which may not leave you enough for your old age.

The major reason for not committing enough towards the retirement goal is the propensity to spend excessively when in younger year. That there will be a sudden drop in expenses after retirement is a myth and yet another reason why people underestimate the required corpus. In reality, post retirement expenses will be just as much. While some costs like commuting will be absent, they will be replaced by higher medical expenses and leisure travel costs.

Another mistake is planning retirement only till 75 or 80. Due to improvement in medical sciences, life expectancy has increased so everyone should plan for longer years.

Getting adequate health insurance is the only solution to deal with longer years and booming medical expenses. Many, especially youngsters, don’t get individual insurance policies because they get coverage via corporate or employer's group policies. Not taking health policies at a young age becomes a stumbling block after retirement because you might have already developed several lifestyle diseases. Then, insurance companies may deny you health policies or may charge additional premiums.

Though some suggest 100% equity exposure while saving for retirement because there is enough time on hands, you are still signing up for 100% risk for a critical money goal. Low returns from debt products and high inflation is why you should not keep everything in debt. So all debt or all equity is not the answer. Compared to the current debt return of around 7%, adding equity into your retirement corpus and increasing the blended returns to 10% can make a big difference to your final corpus. For example, an investment of Rs 5,000 per month for 30 years grows to Rs 61 lakh at 7% returns and to Rs 1.13 crore at 10% returns, a difference of Rs 52 lakh.

Retirement and pension plans from insurance companies are high cost products and will give you only low returns, whereas NPS is the lowest cost accumulation tool for retirement and the cost of retirement products from mutual funds falls between these two. Within retirement mutual funds, there is a gap of around 1% between direct plans and regular plans, which isn't something you should ignore, it's not a small cost. While the same investment of Rs 5,000 per month mentioned above for 30 years will grow to Rs 61 lakh at 7% returns, it will grow only to Rs 50.23 lakh at 6% returns.