5 Common Retirement Planning Mistakes & Ways To Avoid Them

By Kian Ng

Planning for retirement isn’t flawless. Learn about some common mistakes and how to avoid them.

Retirement planning is among one of life’s priorities as we would want to have enough to fund a retirement in the lifestyle and up to the life expectancy that we want to live out.

As you prepare for retirement, chances are you may have tripped over one of these mistakes that may cost you in the long-run, for example you may have to work for extra years before you can afford to retire. Luckily, there are ways to recover from them if you are willing to make changes.

Here are some retirement planning mistakes people commonly encounter and some tips to ensure your planning gets back on track.

Mistake #1. Not having retirement plans

Of all the financial mistakes, the most common mistake is when people don’t even have a plan.

In this day and age, you must have some plans to ensure that your retirement planning is on track.

Based on the Employees Provident Fund (EPF)’s annual report, majority of Malaysians have not saved enough to last them more than five years post-retirement. At the same time, according to the Department of Statistics Malaysia (DOSM), an ordinary Malaysian is expected to live for 74.5 years. If you retire at age 55, and your funds dry up by age 60, what will you do to provide for yourself for the following 15 years?

Even if you do have some money tucked away in a retirement fund BUT it is lower than what you have calculated you need, you are still in a vulnerable position. In your desperation, you are likely to become an easy target for scammers. You could end up losing it all.

Solution #1. Start making retirement plans

Retirement planning is important to ensure targeted funds are available upon retirement.

Even though a plan may only cover projected values for your retirement, at least these figures have taken into consideration inflation rates, interest rates etc. Knowing the numbers can give you an idea of what minimum amount you need to sufficiently supporting your chosen lifestyle.

A good retirement plan will also clearly tag different assets towards specific purpose i.e. children education, retirement, or discretionary expenses. The asset tagging for different purposes will allow retirees to cross-check whether their allocation is unbalanced and thus justify whether an adjustment is needed. For example, if investments in unit trust fund are tagged to your child’s education planning, it should not be calculated for retirement planning to avoid double calculation that could give an impression that all plans are still on track when they are not.

Mistake #2. Not investing; only saving

Many still believe the old rationale that their retirement can be funded by their savings. And so they save and save. To them, investing is risky and practically counted as gambling!

The truth is that money needs to grow to catch up with inflation rates. Low interest rates of bank savings accounts are not able to sufficiently grow your money on par with inflation rates.

This is made worse when individuals close their eyes and lump together all emergency savings, business funding, personal expenses funding into one pool fueled by savings while hoping that this is enough to cover all their monetary needs now and always.

Solution #2. Opt to invest your savings

Investing your money helps your money keep up with inflation rates. Avoid keeping all your eggs in one basket by choosing to invest diversely.

How do we invest with better certainty even though there is so much uncertainty in the market?

Managed Portfolio, income portfolio or private mandate accounts can be good options to diversify risk. However ,the composition should be based on your risk tolerance to ensure you have peace of mind while investing. Since we invest to ensure our net worth grows by years, changing asset classes combinations with time is necessary as the market responds differently to current events.

While investing is such a simple term, the options for investors are diverse. To begin, investors should have familiarity with the following questions.

  • Are you familiar with the various assets classes available in the market?

  • Do you know what suits your personal risk profiling?

  • Have you assessed your own risk tolerance?

Now, answering these questions aren’t always as easy as you would need some financial knowledge, time, and also capability to do an analysis on your own. If you need help understanding the questions, seek the aid of either knowledgeable friends (and second opinions!), or consider directly talking to a professional by engaging a licensed financial planner.

Mistake #3. Greed

Many people believe that they can earn easy money by investing in get-rich-quick schemes, with the hope that their wealth can be doubled in the shortest periods of time. Greed blinds their minds from even questioning the validity of such schemes.

A study carried out by the Telenor Group covering scam victims in Malaysia, India, Singapore, and Thailand concluded that Malaysians are the most vulnerable to Internet scams. Which means, the chances for a Malaysian to lose their money is high and this could be costly for those who have invested their entire retirement funding.

Solution #3. Seek a second (professional) opinion

Scammers have many ploys to trick investors into believing them. Even when it seems like the whole world is rushing to jump onto a super amazing opportunity with lucrative returns, it is best if one can stay rational. Face your fear of missing out and calm down.

When returns are lucrative, rather than jump into the pan while the fire is hot, take it more as alarm bells ringing instead. Seek a second opinion from others who are not involved in the scheme but have some good knowledge about matters related to the topic, preferably someone with professional certifications such as a licensed financial planner.

Do your homework too. Make sure that you have sufficient time to evaluate the cost-benefits analysis and learn the pros/cons of the scheme. Learn to resist peer financial pressure while you do your homework. This is to avoid rushing headlong into making the wrong investment decision which could have severe repercussions on your retirement fund.