Retirement planning is not an option but a must.
Have you started planning for your retirement? This is an area you need to take very serious. There is a saying that; anyone who fails to plan has planned to fail. This is to tell you how dangerous it can be for anyone not to have a solid retirement planning in place. You can’t afford to leave your future to chance. Now, people are beginning to take retirement planning very serious. Therefore, sitting on the fence may not help you as an individual. Not having a plan goes beyond refusal to take the right step today. Indirectly, you may be planning for future regrets without knowing. I know that you don’t want to fall a victim. I want to assume that is the reason you are read this piece.
Before you continue with the article, let me ask you a question. Do you know why they usually refer to retirement age as a golden age? It is believed that retirement age should be the period of rest when one is supposed to be enjoying whatever he had laboured for when in active service. I will like to mention that retirement planning is for everybody whether male or female. It doesn’t matter whether you are an employee or self-employed. If you have not yet started your retirement planning or you have started but don’t take it seriously, I want you to see this article as a call to action. I don’t want you to get to your retirement age and say “had I known”. Good enough, retirement planning is not as difficult as some people think. Failing to plan for retirement does not mean that it is impossible for individuals; it is simply negligence. I will highlight some steps here which anyone can take as part of his retirement planning. The steps are not in any particular order.
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- Start early. At what age can you start planning for retirement? There is no any standard particular age you must attain before you start planning for retirement. You can start your retirement planning at any age but it is better and more advantageous to start early. If you start very early, you may not need to stress yourself too much before you attain your retirement goal. For example, if you are just 20 years and you plan to have the sum of $1,000,000 in your retirement at the age of 60 years, you only need to contribute $3,284 every year into an investment that can earn you 8.31% return per annum. However, if you wait till the time you are 40 years old before you start contributing to your retirement account, you will need to contribute as much as $19,500 every year in the same investment yielding 8.31% return per annum. For somebody that started at the age of 30 years, the person will need to contribute $7,700 every year to have $1,000,000 at the age of 60 years old. I think you can see the huge difference between the person that started investing towards his retirement at the age of 20 years and the person that started his own when he attained 30 years old. The person that started at 30 years old needs to contribute as much as twice the amount the person that started at the age of 20 years old contributes. The gap in the yearly contribution becomes wider the more you delay. While does it only require just little yearly contribution if you start early? You are only leveraging on the power of compound interest. As you contribute to your retirement fund yearly, the amount continues to add up. Not just that, each contribution you make earns interest. The juiciest part of it is that your interest continues to accumulate and the interest also yields interest. Ordinarily, the actual total contribution of the person that started investing $3,284 into his retirement fund at the age of twenty years is just $131,360. The remaining is interest earned on the money. No wonder Albert Einstein said that compound interest is the eight wonder of the world. he who understand it earns it and he who doesn’t pays it. That is why it usually touches me when I see young people lavishing money on things that don’t add much value. You can use annuity calculator to guide you on how much you need to calculate to achieve a particular amount.
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- Be consistent: It is not enough to start early, you need to be consistent. Once you started, it is important that you don’t miss any year. Don’t allow any year to pass without making your contribution at the right time. Don’t assume that if you miss a year that you can make it up the following year. Even though you make it up, the value is no longer the same. Consistency is key to your retirement planning.
- Take care of your health: Your health is very important. Don’t engage in things or activities that can jeopardize your health. I am not a physician or medical expert. Therefore, I may not be able to give you any suggestion of what to do to maintain a healthy living. Do you know why your health is very important? You need to be healthy before you can work in order to earn income. Health is wealth. Besides, if anything should happen to your health, it may wipe away all your savings and other resources.
- Increase your Income: This is the time you can work very hard. You need to maximize your strengths and potentials in order to maximize your income. When your income increases, you can have more funds going into your retirement account. If possible, you may need to combine two jobs. If you know that this is feasible, please make use of the opportunity instead of wasting away your time. Another way you can increase your income is the possibility of changing your job to a high paying job with more attractive benefits. This may require that you enhance your skills or obtain additional qualifications that can make you scale to the higher rung of your career ladder. Imagine you get your salary increased by fifty per cent. This will not only impact your disposable income which may make it possible to invest towards your retirement planning, your 401(k) contribution will also increase.
- Increase your contribution: I mentioned the importance of starting early. If you started early or that the age is still to your advantage to start early, I will say congratulations. Nevertheless, I will encourage you not to limit yourself to your initial yearly contribution. There is nothing stopping you in increasing this amount. If you have a windfall, you can invest this into your retirement fund. It will help you in two ways. It will help you reach your retirement goals earlier. Secondly, you will be able to have enough amounts in your retirement funds without the fear of outliving your investments.
- Control your spending habits: At times, the problem with people without adequate retirement planning is not that they don’t earn well. The main problem is just about their attitudes. The attitude of living with two hands in the mouth and uncontrolled spending is the undoing of some people. For you to be able to control your spending, you will need to create a budget. You should know where your money is going. Allocate your income the way you want the money spent. If you don’t do it that way, you will discover that you are just spending while you may not be able to pin point where the money went. One thing that should form part of your budget is your investment towards your retirement planning. You must constitute the habit of paying yourself first. You are not doing yourself any good if you pay everybody except yourself. You have control over the money you have. You can dictate where the money should go. Prioritise your expenses. Don’t spend money on items that are not important. Frugality does not mean that you are cheap. Other people may not understand you but you know why you are doing what you are doing. Don’t live to please others to the detriment of yourself.
- Create emergency fund account: Your retirement planning is not complete if you don’t have emergency fund in place. Please note that your emergency fund is different from your retirement funds. The essence of emergency fund is for you to be able to meet unexpected expenses when occurred. You will need your emergency fund to pay medical bills or certain repairs you didn’t plan for. If you don’t have emergency fund in your savings account, you may end up dipping your hand into your investment. On the other hand, you may be forced to take a loan at a rate that is not friendly. It is expected that the amount in your emergency fund should be able to cover between three and six months expenses. If there is sudden loss of your source of income, you will have something to live on.
- Avoid debts: A question that is common among people is; “Is it proper to invest while having debts to pay?” The answer is; “it depends”. If your return on the investment is greater than the interest you pay on your debts, it may make sense to invest while in debts. But I will say that it is better not to go into debt at all. The reason is that, you can use the money you will be spending to service interest on the debt on other more important things. You can even invest the money into your retirement account. By this, you will be making compound interest to work to your favour instead of allowing it to work against you. There is something about debts. It is easy to enter into debt but it is not easy for one to come out of it. If you enter into debts and you don’t make conscientious efforts towards paying off the debts, the significant portion of your repayment amount may be going into servicing the debts. That is, you will just be paying interest while the principal remains thereby making you to remain in debt for a very long time. Even if you are contributing into your retirement account, debts will have negative impact on your net worth. On this note, I will advise that if possible, you should avoid buying on credit. But for people that may want to use their credit card to build credit, you should endeavour to pay off your card balance at the end of every month.
- Have retirement goals: May be, I should have started this article with this point because it is the essence of your retirement planning. When it comes to goal setting, Joe Vitale has this to say, “A goal should scare you a little and excite you a lot“. You need to project into the future and envisage what you expect to happen when you retire. At what age do you plan to retire? What kind of life do you expect to live? How much monthly or yearly income do you think will be enough for you? How long do you think you will live after you have retired? Remember, all these are just assumptions. The reality will be different from your assumptions no matter how well you planned. Some things will not work the way you planned it. That is why you need to allow some flexibility in your retirement planning. But it is very important that you have your goals written down and start working towards them. If you don’t have goals that you are pursuing, it will be difficult for you to develop strategies that will help you reach the goals. Let’s go back to the example I made above. If one of your goals is to have $1,000,000 in your retirement account when you retire, then you can start planning on how much you need to contribute into the funds every month/year. You need to decide on the minimum level of returns that you must achieve to help you reach your goals. Don’t forget that you are planning for the future. Therefore, you need to consider the effects of inflation. If you factor inflation into your calculation, you may realise that $1,000,000 may not be sufficient for you. Meaning that you may need to quickly increase your yearly contribution or extend your retirement age. Somebody who planned to retire at the age of fifty five may decide to work till he attains sixty years before retiring. That additional five years of active work may make a lot of difference to your retirement planning. It is better to work longer than to outlive your investment. At that time, it will not be possible to go back to work. Therefore, it is better you plan that you will live beyond your life expectancy.
- Right allocation of assets: When it comes to retirement planning, you may need to work with retirement planner who will guide you on the proper way to allocate your assets. Each investment has its own risks and rewards. Invest in assets that match your risk tolerance. Please note that as you grow and start approaching your retirement age, your risk tolerance may change. This means that you may need to constantly monitor the allocation of your assets to reflect your risk tolerance at each stage of life you are per time. The way you allocate your assets will make a big difference in the returns you will get on your investments. If you are an employee, it is better that you make most of your 401(k) contribution as this is contributory investment towards your investment. Whatever you contribute, your employer will have to match it with its own contribution. That is why it is good to take the advantage of the opportunity. Also, you need to think about the tax implication of any investment you will make. You should let tax work to your favour. I know that contribution to your Individual retirement account (IRA) is tax deductible. It helps you to defer tax payment till the time you start withdrawing from the account. This will be to your advantage if it will result to paying less tax in the future. Another thing you need to watch out for as part of your retirement planning is the fee you may need to pay on your investment. You should invest in assets that don’t require you to pay high fee. Initially, the fees may seem insignificant. But by the time you add it up over time, it becomes very significant especially when you calculate the returns the money would have fetched you if invested.
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Risks Involved in Retirement Planning
- Insufficient Contribution: If the amount you contribute towards your retirement is too small, you may not have enough amounts in your retirement account in the future. The way to mitigate this risk is to start early and ensure you contribute enough into the fund. You may also need to derive a way of earning extra income. It is better to deny yourself of some pleasure now so that you can have enough money to contribute towards your retirement account. You will reap the benefits in the future. That is why it is an investment.
- Poor performance. When you are investing, you assume that you will enjoy a particular level of return on the investment. But this is just an assumption. The truth is that you may not have control over the events that will make the returns happened. Even when you invest in mutual funds, the fund still invests in other companies. It is the performance of those companies that determines the rate of returns on your investment. However, if you want to reduce this risk, you may choose investments with minimum guaranteed income. However, this may limit the performance of your investment too thereby making you not to have enough money in your retirement funds
- Inflation: Money loses value in inflationary economy. Though you may see your investment increased, the amount may not be sufficient to meet your needs as the inflation must have eroded its value. The best way to guide against the effects of inflation is not just to invest on assets that grow with inflation; you should ensure that you have more than enough money invested. With this, if it requires paying double to buy the same items you buy today, you will still be able to afford to pay.
- Market crisis: In every century, there has always been the history of market crash. This usually has more impact on the retirees who can’t go back to work to earn fresh income. You can just imagine what will become of a retiree who lost more than half of his investment in the stock market. This is a catastrophe. That is why proper allocation of assets is very important. If one invest in high dividends stocks, one may not feel the effects of stock market too much as dividends stocks tend to offer investors high dividend yield during recession.
- Longer life. Life is good only when you enjoy it. What happens if you live longer than your projected life expectancy? If you think you will live for eighty years and end up living up to ninety five years, how would you survive? It is better imagined. At that age, you can’t go back to work. It is better to over-estimate your life expectancy than to outlive your retirement fund. This will help you in your plan to decide on how much you should contribute into your retirement account. Also, it is better to work longer than to retire too early.
- Medical Issues: You may think you will not need to spend too much when you retire. This may be true to certain extent. This may only apply to certain expenses but at the same time, some expenses may increase. Such expenses are medical bills and cost or repairs. At retirement age, your furniture may likely become too old. If you are not replacing them, you may need to buy new one. Also, as you are growing older, certain health challenges may begin to manifest. In order to remain healthy, you will need proper medical care and this costs money.
These are just few tips about retirement planning. It is advisable that you approach retirement planners that they can advise you on best way to go about it. Retirement is more than putting money aside for the future. It requires proper allocation of resources. Retirement planner will be able to advise you on the type of investments that will match your goals and risk tolerance.