Retirement is one of the important life events many of us will ever experience. From both a personal and financial viewpoint, realizing a comfortable retirement is an extremely wide procedure that takes sensible planning and years of perseverance. Even once it is reached; managing your retirement is an ongoing responsibility that carries well into one's golden years. In this article we will discuss few things about retirement planning that will help you in making proper decision on your retirement planning.
Retirement is an inseparable phase life, and this is the most crucial stage of human life cycle. People have different kinds of needs in different phases of life; it changes according to age, income, lifestyle, etc. Generally we can say that a person has five types of needs such as;
· Physiological
· Safety and security
· Social
· Esteem
· Self actualization
These needs differ from people to people, as we have already mentioned there are many factors that determine peoples need. For example; need of a teen ager is entirely different from that of an aged person. Aged people have social and security need. It does not mean that they had not felt this need before; they had felt it and had satisfied it too. But with the passage of time they spent the major portion of their earnings either in their children’s education, in building a home, for their parents’ health, etc. At the end of the day they forget to keep aside a part of their earning to fulfill their post retirement needs. This situation is common in most of the Indian homes.
5 simple steps to arrive at an ideal retirement plan
Below given are five simple steps to keep in mind while choosing retirement plan.
Step 1: Decide how much income you require to live happily in your post-retirement years. Remember to take into account factors like increased medical expenditure, vacations, gifts for family, etc.
Step 2: Find out how much you need to save regularly, starting from today. You can use retirement calculator to determine the retirement amount you need.
Step 3: Select the right retirement plan that allows you to meet your post-retirement requirements. Preferably invest in plans which can provide you with potentially higher returns in the long run.
Step 4: Start saving now so you have time on your side and can enjoy the power of compounding. The sooner you are starting the higher your savings will be.
Step 5: Invest a fixed amount every month for your post-retirement years. Systematically investment will help you to multiply tour investments multifold.
Factors to be considered while Planning for your Retirement
Following are the major factors to be considered while opting for a retirement plan.
· Current Age
· Age of retirement
· Years after retirement
· Annual income at retirement age
· Rate of return on retirement corpus
· Inflation rate
Current Age
Your current age is an important factor that affects the retirement planning. If your current age is below thirty, you have enough time to contribute to your retirement. At the same time if it is above thirty the gap between retirement and your current age is less. So it is better to start investing as early as possible. The early you start the premium/ contribution will be less and wise versa.
Age of retirement
Age of retirement is the age which you are planning to retirement. The difference between age of retirement and your current age is the period during that you can invest for your retirement. You can choose the retirement age as you wish. It can be 50, 55, 60, anything.
Years after retirement
Life expectancy is the expected period of your life. The difference between retirement age and expected life is the period during which the company has to pay your annuity. If the years after retirement are more, you need to pay more premium/ contribution.
Annual income at retirement age
While going with a retirement plan you should consider your income at the time of retirement (no doubt it will be more than your present income) because as the income increases your standard of living also will increase. So try to choose an annuity that will help you to continue your life with same standard of living.
Rate of return on retirement corpus
Before investing in a retirement plan, consider the rate of return provided by the plan. Because investing in a place that is not able to generate decent returns will not help you to continue the same standard of living after retirement.
Inflation rate
Inflation is the factor that decreases the value of money. So be smart enough to choose an investment that provides you more return to cover the threat from inflation.
10 things to do before Retirement
There are some points that you need to know and follow before you reach the retirement age. This will help you to lead a comfortable post retirement life without facing any financial problems.
· Prepare a Balance sheet of yourself
· Review your savings and borrowings
· Prepare a budget & review it
· Assess Your life insurance needs
· Eliminate unwanted expenses
· Consult a Planner to plan your investments
· Create a portfolio using the Right Financial Ingredients
· Have a review of your Investment Mix
· Invest for Income
· Set Aside Emergency Funds
Prepare a Balance sheet of yourself
We recommend you to prepare a balance sheet of yours, showing your assets and liabilities. The very objective of this is to determine your net worth. Assets include personal possessions of value, such as;
o Cash
o Real estate
o Investments
o Liabilities are;
o Your debts
o Legal obligations
You can prepare your balance sheet by using a spreadsheet, this will help you in determining your net worth and there on to plan your finance.
Review your Savings and Borrowings
It is very important to have a close eye on your Savings and Borrowings. It's a fact of financial world that the cost of borrowings is always more than earnings from savings. For instance; if you take personal loan from a bank, they will make you to pay 20-30% annual interest. At the same time if you investing I bank they offer you 7-8% annual interest. So it is always better to clear off the debt if you have cash to spare.
Prepare a Budget & Review it
Retirement is the period during which you will not work. So it is necessary to prepare a paper budget or spending plan to update yourself about what your actual living expenses will be once you are not working.
Every person will have two kind of expenditure Fixed & Variable. In this variable expenditure is more, we mean to say that most of your expenditure can be controlled if you wish to do so. There are some expenses that go away once you are not working, like travel, food, dress, etc. Food costs may go down if you used to eat lunch at house. So think before taking any decision related to expenditure, a wise decision can save you from losing money unnecessarily. Avoid unnecessary expenditure and accumulate a portion of this towards your post retirement expenditure.
Assess Your life insurance needs
Every person should have life insurance cover so that their family will be in a safer side if anything wrong happens to you. Term and life insurance are two important types of insurance that can cove the risk of your life. If you are planning to go for a life insurance once you are 50 or more, it will cost you more so it is always better to have a life insurance cover you are young.
Most of the life insurance companies are offering Retirement Plans, if you are going for a retirement plan, it will help you to replace your salary once if you are retired. If the right decisions are made when electing your pension options, your spouse will be able to continue the pension. Term insurance is generally recommended for young people who have debt, dependents and few assets. However, a life insurance policy may be necessary for estate planning or other purposes.
There are so many types of insurance policies that fulfil your different needs. You have to think and choose the right one that can fulfill your needs.
Eliminate unwanted expenses
Expenditure heads should be identified and also given proper attention. Always make sure that you are eliminating unnecessary expenditure, including your children’s educational expenditure. The time to fund your children's college educations is when they're small and not when they are Graduating and you are counting down to retirement.
As we have discussed already, list out the expenditure according to priority and avoid all possible expenditures.
Consult a Planner to plan your Investments
Most of the times people feel difficulty in planning their finances. So it is better to consult a financial planner for guidance. An efficient financial expert can get a comprehensive perspective on your whole financial situation and determine if everything is in order and you are really prepared to face retirement. He can guide you from re-evaluating your portfolio to your investments structure.
Create a portfolio using the Right Financial Ingredients
Most of the studies done on retirement planning had proved that a large percent of people allocate their money to just one single fund. Another major percent of people allocate their money to only two funds. Only a small percentage of the people understand the importance of diversifying their funds. Use of diverse mix of funds or multiple ingredients will help you to achieve your investment goals.
Have a review of your Investment Mix
We will understand this point with the help of an example; if your music player is too loud, do you throw it out the window? Of course not! You simply adjust the volume and get it back to an tolerable listening level. The same applies to your retirement plan. Instead of dropping your plan into the garbage, get an acceptable mix of investments that match your risk tolerance and financial goals.
Invest for Income
You may have built up a sum of money in the bank, from the sale of a property or by investing wisely, yet at some point, it will be important for you to actually see the benefit of your hard work. You may then need to consider changing your investment strategy from 'growth' to 'income'. In order to achieve better returns you may have been happy taking a risk with some of your money. But can you now afford to lose what has been taking you years to build up? Investing for income generally means taking a lower risk and seeing the benefit each month or each year in the form of an income payment. Ultimately, it's your money and you should enjoy it!
Set Aside Emergency Funds
Before reaching your retirement age you need to make sure that you have set aside sufficient funds for unexpected costs. This buffer will ensure that you avoid using assets allocated for income or growth purposes. As a general rule of thumb, we suggest saving about three to six months worth of expenses for your emergency fund.
Emergency can be anything like your car repairs, dental work, or travel expenses for a family member's illness or death. Make sure your emergency fund is liquid. Remember to replace emergency funds as you use them.
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