Understanding Retirement Planning
Retirement planning, according to a financial perspective, refers to an allocation of revenues or savings for the future. The primary goal of retirement planning is attainment of financial independence at retirement. For most, the time horizon from which they plan to retire is in the range of ten years to thirty years, though other factors such as length of employment and overall income level also affect the retirement date selected.
In spite of the increasing awareness of retirement planning in most countries, its benefits have not been widely embraced. There are some factors that contribute to this reluctance to make the transition from full-time employment to early retirement. One of these is the perception that retirement is a natural stage in one’s life, which needs to be handled with care. Another is the limited amount of financial resources that individuals have at their disposal. Although the ability to manage retirement expenditures is not a given, it is possible to reduce expenditures by planning ahead.
Retirement planning can be divided into two categories: pre-retirement and post-retirement. Pre-retirement planning involves planning for the future, which includes making investments to buy a house, purchasing a car, enrolling in a health insurance scheme, getting married, buying a pension, getting an education, acquiring professional skills and pursuing an interest. These activities help one maintain the standard of living that one had when one was working. Post-retirement planning involves buying assets such as fixed-income schemes, mutual funds and certificates of deposit. This helps to reduce current debt levels and enable one to build a nest egg to enable the person to live comfortably in the later stages of his or her life.
Since the financial objectives of any individual differ from person to person, the same individual may also have different preferences regarding the extent of the planning activities required. However, all persons who are financially capable should invest in some form of fund to help them reach their retirement goals. The assets that are used in retirement planning vary greatly, depending on the objectives of the person concerned. Some people prefer to save for their children’s education and some want to invest in liquid funds, such as gold and real estate. Others may use assets to increase their income during retirement, such as stocks, bonds, mutual funds, annuities and so on.
Retirement planning requires some careful planning. The initial steps include creating a list of assets that will be used in retirement, including the age and net worth of each asset. Next, the person should determine the time horizon at which he or she plans to retire, taking into consideration the level of work performed by the individual. and the rate of inflation. At the same time, the plan should take into account the lifestyle of the individual and the expected contribution rates from the employer’s insurance plan.
Retirement planning may also include investments that will be required for retirement, which depend on the level of earnings and the type of employment of the person concerned. These include annuities, bonds, money market funds, annuity and stock options. Once the individual has decided on the asset that will be required for retirement, the next step is to calculate the annual withdrawal amount required, considering the rates of interest, the level of withdrawal penalties, the rates of tax, the minimum cash availability, and the risk factors involved. The calculation process may also involve deciding on the lifetime income and expense accounts, whether one will receive the same benefits from an insurance or investment fund. The last step is the selection of an investment strategy, which will help the individual to attain the desired financial status after retirement.
Another important factor that influences the selection of investment strategy is the level of the individual’s total income after retirement. The amount of savings is more likely to be obtained if the person makes contributions towards that source, rather than saving towards investments that source in order to pay taxes. The tax-free retirement accounts are the safest bet. The most important aspect of planning for retirement is the accumulation of enough funds to support the daily expenses and the future living expenses in case of an early death.
Retirement planning involves a combination of several important elements. These include planning for the future, budgeting and saving for retirement, making investments for the future, and having enough funds for the future after retirement.