Every runner who wants to win the marathon race has a plan in place long before the race starts. But what if he has the wrong plan? For instance, if his diet or exercise or training schedule is not right, he may not be able to do his best in the race. The same principle is applicable in the area of investments. You may have a retirement plan in place. But are you investing in the right way?

Here are some mistakes you need to avoid so that you can create a substantial fund for your retirement.

Ignoring inflation

In 2000, a litre of petrol cost just Rs 26. Fast forward eighteen years and it costs around Rs 75 per litre today. How did the petrol price increase so rapidly? The answer, among other things, is inflation.

Inflation is the rate at which the price of goods and services increases over the years. It reduces your purchasing power. You may plan to save a certain amount of money for your retirement based on your current income and expenses. But with inflation rising over the years, your savings may not be adequate to meet your financial needs during your retirement.

What you should do:

Don’t ignore inflation. When deciding the amount of money you need for retirement, include a realistic rate of inflation into the calculations. This means you may have to increase your initial estimates when saving for future. But that shouldn’t be a major cause for concern. By investing in equity mutual funds, it is possible to earn high inflation-beating returns in the long term.

Delaying your investments

There are a lot of important milestones in a person’s life: buying a new car, taking the kids on a trip to Disneyland, purchasing a house and so on. When you are busy living your life and meeting these important life goals, you can tend to ignore or postpone planning for your retirement as it is still far away in the future. This is a wrong approach because once your retirement comes closer and closer, it is possible to become overburdened and make wrong investment decisions.

What you should do:

Always invest a portion of your current income towards your retirement fund. In fact, the best approach is to begin investing for your retirement the moment you start your professional career. This allows your investments a longer time period to grow. Even a ten-year head-start can result in tremendous returns. Consider the following example:

Imagine that you start investing Rs 6,000 per month in an equity fund at the age of 35. If the fund offers a 12% annual rate of return, you would earn a sum of Rs 1.1 crore by the time you retire at the age of 60.

Now, let’s assume you start investing the same amount at the age of 25. With all the other factors remaining constant, you would earn a sum of Rs 3.9 crore!

Just by giving your investments more time to grow, you can earn much higher returns. This is the power of compounding.

Dipping into your retirement savings

If you are already investing for your retirement, it is very commendable. But are you withdrawing money from the fund from time to time so that you can meet your current financial requirements?

In case of emergencies or other major expenses like funding a child’s marriage or buying a house, many investors dip into their retirement savings. This can solve the current problem but it can turn out to be a problem in the future.

What you should do:

From an early stage, you need to categorise your investments distinctly. Don’t invest broadly for the future. Instead, you need to have a proper financial plan to help you meet specific goals. For example, you need to have an emergency fund (equal to six months of expenses) to meet any unexpected expenses that may rise up from time to time. Similarly, you need to invest separately for different financial goals like going on a world tour or buying a house. This way, you can meet all your different financial goals without having to fall back on your retirement funds.

Conclusion

Retirement is considered as a second childhood. You don’t have to worry about school, exams, work, career or appraisals. You have the freedom to explore new interests and hobbies. But in order to truly enjoy your retirement, you need to have financial independence. Equity Mutual fund is an important aspect of financial planning. By investing in the right way, you can achieve your goal of creating a large corpus for your retirement.