7 deadly sins: Financial mistakes that can eat up your retirement fund Here are some less-discussed risks that, if left unaddressed, could come back to haunt you in your dotage.

Dev Ashish

Moneycontrol Contributor

You only get one shot at your retirement. And the cost of getting it wrong is catastrophic.

So proper planning for an optimally funded retirement is a must.Now when we talk about risks during retirement, you might feel that it’s too early to worry about it. After all, risks during retirement are still several years (and decades) away.

But let me tell you that not being aware of these risks means that assumptions made today are unlikely to be correct. And that would mean that your retirement plan isn’t built for the full set of scenarios.

Miscalculating your retirement corpus is a cardinal sin in financial planning. Here are some less-discussed risks that, if left unaddressed, could come back to haunt you in your dotage.

1. Outliving your retirement savings - This is the risk of living longer than what you saved for! It’s good that you will live longer. But if you don’t have the money, then it can be extremely difficult. Let’s take an example to understand the gravity of this risk. Suppose you are saving for a retired life of 20 years, i.e. you retire at 60 and (supposedly) die at 80.

This means that the retirement corpus you would have accumulated by 60 will be enough to last until you are 80. But what if you don’t die at 80? Underestimating the length of your retirement may result in you spending more in early years which might result in the risk of running out of money in the twilight of your life.

2. Sequence of return risk - Suppose you retire with a portfolio of Rs 2.5 crore today. Your starting annual expenses are Rs 10 lakh. Now if the returns in initial years are negative, then your portfolio will deplete doubly quickly because of annual withdrawals (which themselves increase due to inflation) and due to investment losses. So if the return on the portfolio is -10% during each of the first 3 years, then this will be your portfolio position at the end of the 3rd year:

On the other hand, if the returns were good, something like +10% in each of the first 3 years, the story would have been happily different:

So the sequence of returns, at least during the start of your retirement, holds massive significance. The order of returns will impact how long your retirement portfolio lasts. This highlights the fact that it is all the more important to de-risk your retirement portfolio as you get closer to retirement.

3. Healthcare becoming part of routine expenses - The chances of living longer are high. But that also means that healthcare costs will continue for more number of years. You might be in good health. But as you age, your body (the machine getting old) will need upkeep and maintenance more frequently. And all this will cost. You might also need to spend money on getting assistance for regular household chores with age. For most retirees, health-related expenses will become part of predictable routine expenses. Also remember that the health insurance premiums will go up with age.

4. Unexpected healthcare costs - The above expenses were about the increase in expenses due to normal age-related changes in lifestyle and the need for physical upkeep. This one is more about those unexpected and unplanned medical expenses. You might have health insurance at the time of retirement. But who knows whether it will be enough for unexpected medical expenses during retirement or not.

5. Unexpected events - The unexpected events might not necessarily be medical emergencies. There might be others too. It is possible that you may have to suddenly undertake massive repair work in your house or partly finance a grandchild’s education (if your children don’t plan their finances well). Who knows? Any large unplanned withdrawal from the accumulated corpus, more so do during the early stages of retirement, can result in a shortfall in the later years.

6. Unpleasant tax changes - There is nothing to be explained here. You never know when the future governments might decide to introduce / increase taxes on something that you never expected them to. That risk will always be there.

7. Fall in annuity rates - Many people take the annuity route to get regular income in retirement. What if the rates after 15-25 years when you retire fall to horribly low levels? Such falls in annuity rate and other rates will lead to inadequate income during retirement and you may have to start dipping in more frequently into your remaining corpus itself.

I don’t want to scare you here. But these are some real risks that can derail anyone’s retirement plans.

And I am sure neither you nor anyone else would want to have negative surprises during retirement.

The good thing is that more and more people are becoming aware of these risks. It is not without a reason that retirement planning has been referred to as the nastiest problem in finance. So if you still haven’t given serious thought to planning your retirement, may be you should do it now then.

The author is founder of StableInvestor.com.First Published on Dec 28, 2018 06:42 pm