Retirement is an eventful time with too many changes involving many uncertainties. Financially, retirement is a dynamic goal you must reach to have a well-deserved and comfortable life. To achieve it, you need a well-thought-out plan.
Retirement planning helps you determine financial goals and create a strategy for them. It tells you how much money to save, where to invest, and when to start drawing income from your retirement corpus.
But retirement is not only a financial milestone, and no longer limited to savings and nest egg. Other aspects like health, emotions, and awareness can affect your quality of life. Multiple risks are associated with each of them. If you are aware of and well prepared for them, you can manage them.
In a young Country like India, Retirement Planning does not get the attention it deserves. But when you look at the developed countries, having the old age population, you understand the challenges one faces after getting into this stage of life.
Here we list the 21 most common risks to retirement and practical ways to mitigate them. We have categorized these risks into the following categories:
- Lifestyle and Health
Lifestyle and Health Risks to retirement
- Unhealthy Lifestyle Choices
Poor health habits such as a sedentary lifestyle, unhealthy eating, smoking, and unhinged drinking can increase the risk of chronic diseases as you age. These conditions can lead to higher medical expenses. And do not forget about a lower quality of life and increased dependency on others for daily chores. As healthcare costs rise with age, unhealthy habits can exacerbate the financial burden of medical care in retirement.
Having a balanced diet, quitting or at least limiting addictive substances, and staying physically active are therefore necessary to enjoy your retirement. Keeping yourself occupied in physical activity like walking, cycling, swimming, playing a sport, or hiking is a good start. They will keep you busy as well, and thus active socially and mentally.
- Need for Long-term Care
Long-term care can be very expensive. In case you or your partner needs long-term care, it could easily wipe out your retirement savings.
Get regular checkups, especially after 40, and if you have a family history. Visit your doctor regularly so there are no surprises, and you can be prepared.
- Retirement Living
Many seniors wish to maintain independence and want more time for themselves and their partners. Sometimes, the family is not around as they are in other cities or countries for studies or work. Therefore, they may choose to retire in a retirement community with peers.
Depending on the facilities and the location of the community, they can cost between ₹30 lakhs to ₹1.5 crores as an upfront deposit with ₹15,000 to ₹30,000 as monthly expenses, per person. Make sure that you have adequate funds if you are considering this option.
- Lifestyle Choices
Your lifestyle choices may change after retirement due to many factors – more time on hand, a lump-sum retirement corpus, expectations, and a desire to live your dreams.
Just remember there are no free lunches, and every choice will cost you.
Next few risks come under Behavioral Risks to Retirement
Whether it is investing for retirement, starting to work out, getting an annual health checkup, or simply drawing up a plan – we put it off for tomorrow or the next weekend. We keep making excuses why we cannot do it now.
Today you may feel that you have ample time to plan and execute them. But delaying important decisions– financial or otherwise – and failing to act on them in time can have severe consequences.
For example, with a monthly SIP of ₹10,000 compounding at 10% you will reach ₹1 crore mark after 23 years, ₹2 crore mark in close to 30 years. Let’s say you started when you were 25, you can expect a decent corpus by the time you turn 55.
However, if you start just five years late when you were 30, you will have to either pray that you can earn an additional 3% return. Or you must contribute more than ₹16,000 every month – a 60% higher payout.
The longer you delay, the harder it is to catch up and it becomes more expensive. (Read: Is your Money giving you stress?)
Retirement can be a lonely time. Not having a support group, developing habits to keep you occupied, and having a purpose can make it more challenging. Loneliness hurts your physical, emotional, and mental well-being and consequently your finances.
Make a strong support group of friends and family by including them in your plans. Get involved in clubs, societal activities, and cultivate engaging hobbies.
- Impulsive Actions
Haste is waste!
If you are habitual of making impulsive decisions then it may hurt your retirement plans as well. For example, you may purchase the latest iPhone and let your monthly SIP bounce. Impulsive behavior may also attract you to high-risk activities such as investing in high-risk assets or falling for get-rich-quick schemes.
When it comes to your financial well-being and retirement planning, do not jeopardize your savings and plan well ahead. Make informed and well-thought-out financial choices after considering the long-term implications of your actions.
- Pocket to POS
POS – Point of Sale machine
Even if you are not impulsive, you may be fond of things that are not in your budget. You may think “Let me buy it on EMI or using a Credit card. After all, I’ll pay it later!” But, living beyond your means and consistently spending more than you earn can deplete your savings.
Remember, like good habits, bad habits also compounds. Develop a disciplined approach to managing expenses – spend in this sequence needs, comforts, investments, and then only desires. (Read: 21 Good Money habits)
Make it Pocket to Portfolio!
- Awareness Risks to retirement: Neglecting Financial Education
Failing to prioritize financial literacy and staying informed about personal finance matters can hinder your ability to make sound financial decisions. A lack of understanding about investments, retirement goals and needs, and tax implications can result in missed opportunities and poor choices that impact your retirement savings.
- Execution Without Planning
Failing to create a comprehensive retirement plan and regularly reviewing and adjusting it as needed can be detrimental. Without proper planning, you may underestimate the amount of savings needed for a comfortable retirement. It can leave you unprepared for unexpected expenses or market fluctuations. Lack of financial planning can result in inadequate funds and the need to make sacrifices or continue working longer than desired.
- Oblivious to External Factors
Government policies and regulations surrounding retirement accounts, taxes, and other investments can change over time. For example, the government changed the rules related to NPS in India, also tax benefits are not available in new tax regime, even the debt mutual funds, EPF rules are changed. These changes may impact retirement planning and the expected income during retirement.
Sometimes unexpected international medical (pandemic), geopolitical (Russia-Ukraine conflict) or economic (recession in Western economies) events can also affect your retirement corpus.
Staying informed and being adaptable in adjusting financial plans accordingly is important.
- Financial risks to retirement : Health Care Costs
Rising healthcare expenses can significantly impact retirement budgets. It is important to consider the potential
costs of long-term care, insurance premiums, and out-of-pocket medical expenses.
Making conservative estimates for healthcare costs and exploring suitable insurance options is essential.
- Excessive Debt
Even if you plan and budget everything, if you have a substantial outstanding debt when you are entering retirement, it can be a significant burden. High-interest debt, such as credit card debt or personal loans, or high-ticket debts like mortgages, can eat into your retirement income and limit your ability to enjoy a financially secure retirement.
Never take a personal loan unless you have exhausted all other avenues. Manage and pay off high-ticket debts well-before retiring to avoid financial stress.
- Asset (Mis)allocation
You may also call it as “Wrong Investments” Risk. We are humans and thereby prone to favor a certain sector or instrument of investment. In lure of high return or to keep yourself safe from market risks, we get into wrong investments. It is important to be in right allocation for your long- and short-term goals. There is no perfect plan, therefore regularly consult a professional to be on the safe side. (Read: Financial planning Thumb rules)
- Inflation Risk
Extrapolating inflation at a lower rate is once again a human flaw as we are eternally optimistic about the future. High inflation erodes the purchasing power of your savings over time.
Invest in assets with the potential to outpace inflation. Consider adjusting your retirement income and expense strategy to account for rising costs.
- Market Volatility
“Markets can remain irrational longer than you can remain solvent” ~ John Maynard Keynes
Even routine market fluctuations – in equities or debt – can impact the value of investment portfolios. A significant downturn close to or during retirement can have a lasting negative effect on the corpus you retire with. It’s important to diversify and consider a mix of asset classes to mitigate this risk.
- Longevity Risk
Thanks to better healthcare, people are living longer. This means you might live almost an equal number of years after retirement, that you spend during your active working years.
The risk of outliving your savings is very real and is the biggest risk for many retirees. It can happen if you underestimate your lifespan, underestimate the inflation, or overestimate the income potential of your corpus.
Your retirement corpus should last longer than your and your partner’s life expectancy. Plan for an extended retirement by saving more. Consider mix of SWPs, Annuities or guaranteed income schemes to help manage this risk. If you don’t have enough saved, you may need to cut back on your spending or even work longer than you planned.
- Withdrawal Rate Risk
The rate at which you withdraw money from your retirement savings affects how long your funds will last.
Withdrawing too much too early in retirement can deplete savings prematurely.
Follow a sustainable withdrawal strategy, such as the 4% rule (as being followed internationally). It may work out differently in India as per your investments structure. It is better to take the advice of an expert here.
- Home Ownership
The value of your occupied home is part of your net worth, but it cannot generate income for you. Even if you rent out a part of the home, the rental yields are typically 1-1.5%. Therefore, the cost of a home can tie up a large part of your total assets in a no- or low-yield asset.
Owning a home also ties you up to the place you are living and you have limited options to consider relocating or moving into a retirement community.
Remember, owning or renting a home is truly a personal and emotional decision that can affect your retirement plans. In many financial plan calculations, I have observed a clash between savings towards Retirement, Child education and home buying. So, plan prudently
- Falling for Scams
As technology advances, there are many more ways to scam people. Seniors fall for these much more easily as they are more trusting than others, especially others who give them attention!
Sometimes, even an acquaintance can play tricks on you to scam you.
Do be wary of conmen and scams and always do due diligence before investing, lending, or spending a large sum.
Mitigating Risks to Retirement Plan
The above-mentioned list is not exhaustive and there could be many more hidden Risks to Retirement planning. The whole point is to be vigilant and aware of what you do with your money and life. Your habits, your lifestyle, your expenses, your health, your relations …and many other things collectively impact how well you are going to be in your Retirement Years.
It is also advisable to consult a financial advisor who specializes in retirement planning. Their personalized advice would be based on your specific circumstances, aspirations, and goals. Since the planners are in touch with many different set of client profiles so you will also gain good insights from their experience. With a comprehensive strategy, you can protect and grow your retirement savings, and be prepared for many What Ifs.
Do not forget that retirement is also a dynamic phase requiring you to regularly review the plan and do an occasional course correction.