Retirement is a phase of life that is meant to be lived financially comfortably. In order to have a pleasant life post-retirement, it is required to have a plan from an early stage of professional life. It is an essential part of financial planning which is recommended to start in your 20’s itself. But while planning for such an important phase of your life, you must ensure to make wise decisions. The concept of savings and investment can be quite overwhelming and a single wrong step can have a bad impact on finances which can disturb the retirement plan.
5 things to avoid while planning for retirement investments
1. Delaying the Plan
As mentioned earlier, a retirement plan should be started as soon as you get your first paycheck. Delaying the plan to your 30’s or 40’s thinking 20 years of savings is enough for retirement (assuming retirement age 60) can be a very wrong decision.
Usually, at the early stages of professional life, you’ll have fewer responsibilities which makes it easy to put a large chunk of the income into the retirement savings. 20s can be too early to think of retirement but the older you get, you have additional responsibilities like home loans, car loans, kids education, insurance, etc. The more you delay the more your investment amount keeps increasing. Hence stop delaying your retirement savings and start as early as possible.
2. Not Analysing Budget
Saving for retirement doesn’t mean you save a random amount of money every month. Assume you are saving 10% of your monthly income. After 30-40 years of saving, the amount accumulated might not be sufficient for your post-retirement life.
Making a budget for the post-retirement life would help in such cases. Starting with understanding what you need, how and where you want to live post-retirement will help you create your budget. Once you have a plan you can focus on the budget required to fulfil the post-retirement dreams. According to the budget, you can pick your investment portfolio that would earn sufficient returns to spend post-retirement.
3. Not Including Inflation
This is one of the common mistakes every investor commits. Though you make a budget of how you want to live a comfortable life after retirement, you must note the fact that after 20-30 years the cost of living will not be the same as now.
If you are planning to live with a budget of say 35000 AED monthly, when inflation takes place, the budget you have in mind may not be sufficient. At an average inflation rate of 3%, in 30 years your required budget would be approx. 85000 AED which is more than twice the budget you’ve calculated now. Hence not taking inflation into consideration can hugely backfire your financial life.
Calculate Inflation for the Future using Inflation Calculator
4. Wrong Investment Selections
An investor must always pick investment only after understanding the working of the investment. Along with that, you must also analyse your risk appetite; Not just the working conditions of the market but also how much risk your own financial life can take is important. There are a wide range of investment plans with different risk profiles like high-risk, moderate-risk and low-risk.
As your investment goal is retirement, check your risk appetite, understand the nature of the investment with the pros and cons and proceed with it.
Understanding the investment profile also involves the tenure of the investment. Picking an investment product for the long-term while you are nearing your retirement can be of no use. Also, investment options like stocks, mutual funds need time to grow to fetch you good results. Picking these when you have limited time may not be feasible. But if you have more than 2 decades for your retirement, then you can deal with the ups and downs of the high-risk investment products in the market.
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5. Imbalanced Portfolio
Having a balanced investment portfolio suggests picking a portfolio that would balance the risk and returns of the investment. You must have the right mix of investment assets that matches your risk tolerance and the investment goal. Investing your entire money in a high-risk portfolio can adversely affect you. If you are investing 60% of the money in a high-risk asset then the rest 40% can go into a low-risk one. Regardless of your age and how close you are to retirement, balanced allocation is required. That is the primary factor through which an investment portfolio works great is because of the right allocation.
Also, note that investments don’t work if you just set it and forget. Constant observation is needed. Along with balancing it into the right set, you must also rebalance it from time to time.
Your entire retirement phase depends on the choices you make during your professional career. Even a small wrong decision can disturb in achieving your target smoothly. The more time you have for your retirement, the more smart choices you can make.