Avoiding the Big Retirement Risks

Retirement isn’t just a break from work; it’s a new chapter in life. And like any big life change, it needs careful planning. Most people focus only on saving money. However, they often forget to plan for the retirement risks that could damage their retirement goals.

Things like inflation, rising medical costs, or living longer than expected can quickly drain your savings. Around 57% of urban indians fear that their retirement corpus may last for just 10 years. That’s why retirement planning is not just about building a large fund. It’s also about protecting it and using it wisely.

Some risks, like sudden illness or market dips, can’t be predicted. But you can prepare for them. Overspending, being too cautious with investments, or not sticking to your plan are common happenings.

This blog will walk you through six common retirement planning mistakes and show you simple, practical ways to avoid them and stay on track.

“And thinking about retirement makes one feel old, almost ancient. But, we all need to think about it – sooner, than later.  The sooner we think, lesser the money that needs to be saved per annum, till retirement.  That amount can be mind-numbingly large, if you start late.” Suresh Sadagopan, Financial Planner, SEBI RIA, MD & Principal Officer - Ladder7 Wealth Planners P. Ltd

Risk 1: Underestimating Longevity Risk In Retirement

People are living longer than ever. India’s life expectancy has reached nearly 70 years, and many live into their 80s and 90s.

Living longer means you need to have savings that last longer. Also, there will be increased medical costs and potential market risk during retirement, increasing the risk of running out of money after retirement. So, it is better to plan than to run out of money after 10-15 years. Here’s how to manage it well:

• Create a diversified income strategy: Use multiple sources like pension, EPF, NPS, mutual funds, senior citizens savings scheme, and annuities. This ensures steady cash flow in retirement.

• Work a few more years: Delaying retirement by even a few years gives you more time to save. It also reduces the number of years your savings need to last.

• Explore part-time work in retirement: A part-time job can supplement income and reduce the pressure on your retirement corpus.

• Consider a lifetime income annuity: This can provide a regular income stream, avoiding retirement risks of outliving your savings.

• Use a bucket investment strategy: Divide your retirement savings into short-term, mid-term, and long-term "buckets". This helps in retirement risk management and reduces the risk of selling investments during a market dip.
  

Risk 2: Ignoring Inflation

Inflation and retirement income may not seem like a big deal now, but over time, it can quietly reduce the value of your money. ₹50,000 today won’t buy the same things 20 years from now. Healthcare and lifestyle costs often rise faster than general inflation, which is 6%.

“Inflation is taxation without legislation”-Milton Friedman

Here’s how to manage it well:

• Invest in growth assets: Keep part of your money in equity or hybrid mutual funds to beat inflation.

• Choose dividend-paying stocks or low-volatility equity funds: These offer better returns than fixed deposits or savings accounts. 

• Build a tax-smart plan: A good tax strategy helps your money grow faster and offsets the inflation impact.

• Cut costs during spikes: If inflation rises suddenly, adjust your budget temporarily to stay on track.
  

“The approach has to be to protect the needs you have for the next 3-5 years in safe investments, so that short-term market fluctuations do not impact you just as you get used to the concept of retirement Beyond that, senior citizens will need to have part of their funds invested in equity or growth assets, which have a higher certainty of beating inflation over longer durations,”-Lovaii Navlakhi

Risk 3: Over-Reliance on Pension or EPF

Relying only on EPF and pension funds may not be enough after retirement. These sources provide fixed income, but that amount may not keep up with rising living costs. Healthcare, travel, and daily expenses grow over time, especially due to inflation. This can reduce your financial freedom and force you to cut down on your lifestyle. You might even risk using up your savings too quickly.

Here’s how to manage it well:

• Diversify your investments: Add EPF, NPS, mutual funds, and other investments to your portfolio.

• Build an emergency fund: This gives you a cushion for unexpected expenses.

• Consider annuity plans: They provide steady income for life.
  

Risk 4: Medical Emergencies

Medical costs can rise sharply with age. Healthcare costs already consume around 62% of the retirement corpus. This leads to financial stress and forces you to dip into your long-term savings. To avoid this, prepare for healthcare costs just like you plan for daily expenses.

Here’s how to manage it well:

• Senior citizen health insurance policy: It helps cover major hospital expenses, so the retirement fund is not affected.

• Create a separate medical emergency fund: Keep enough money aside for unexpected health needs.

• Review your insurance coverage regularly: Make sure it matches your age and medical risks.

• Start planning early: Premiums are lower and coverage is better when you begin young. Planning ahead can help you stay financially secure and stress-free in retirement.
  

Risk 5: Poor Asset Allocation

Asset allocation is the process of dividing your money across different types of investments, like equity, debt, and fixed deposits. As retirement nears, moving all the money to safe options like fixed deposits might seem ideal. But it can reduce your returns. An abrupt shift from equity to debt also lowers the growth potential of your retirement fund. Instead, you need a smart balance that changes with time.

Here’s how to manage it well:

• Use a glide-path strategy: Reduce equity exposure slowly, not all at once.

• Choose a hybrid approach: Combine equity and debt based on your goals.

• Use a retirement calculator: Estimate how much you need and plan accordingly.

• Diversify your portfolio: Spread your money across various assets to lower retirement risks.

“Create multiple income streams through rentals, dividends, and digital businesses while keeping expenses low, as lifestyle inflation can erode wealth. Ensure you have at least Rs 1 crore in health insurance, as medical costs are unpredictable.”-Hardik Joshi, a financial analyst Risk 6: Lifestyle Creep or Early Withdrawals

The mistake of dipping into your retirement savings before actually retiring may reduce your retirement savings. You may withdraw money for weddings, vacations, or gifts. While these expenses may seem important now, early withdrawals can hurt your future. They reduce your total savings, may increase your tax burden, and reduce the amount available when you truly need it. After retirement, overspending without a clear plan can also drain your funds quickly.

Here’s how to manage it well:

• Avoid early withdrawals: Keep your retirement funds untouched until retirement.

• Create a Systematic Withdrawal Plan (SWP): This allows you to take out money regularly in a structured way.

• Stick to a monthly budget: Track expenses and avoid lifestyle inflation.

• Plan your expenses separately: Don’t mix short-term needs with long-term retirement goals.

Conclusion

Retirement planning is more than saving money. It's also about protecting your money from retirement risks, including inflation, bad investment choices, and unforeseen expenses.

Small, smart steps can make a big difference. Build a steady income plan. Prepare for rising medical bills. Stick to your spending goals. Stay consistent and keep adjusting your plan as life changes. Consult a financial expert today to review and strengthen your retirement plan.

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FAQ

Who should put their money in a retirement plan today?

Anyone who has started earning should begin saving for retirement. Starting early, even with small amounts, gives your money more time to grow. The earlier you start, the more you benefit from compounding, which leads to a larger retirement fund.

What is the 4% rule in retirement planning?

The 4% rule is used for retirement income planning to identify how much we can withdraw from savings in retirement. The rule suggests annually withdrawing 4% of your total savings. 

 When is the right time to retire?

The perfect moment to retire is when you have saved enough money to pay for 25 to 30 years of who you are. You also want to ensure you have cash flow from your retirement fund, pension, annuities, and/or other investments before you retire.

What if you are late in saving for retirement?

Even if you start in your 40s or 50s, it’s not too late. Focus on saving aggressively, cutting unnecessary expenses, and investing smartly in NPS, mutual funds, or senior citizen schemes. If possible, consider working a few extra years to build your corpus.

How to calculate retirement corpus correctly?

Begin with your current monthly expenses, then adjust them for inflation and multiply those adjusted figures by the number of years you will be retired. A simple formula for this is Annual Expenses × Number of Years in Retirement × (1 + Inflation Rate) ^ Number of Years until you retire. This way you will save enough to cover the future expenses and future medical costs.