You might spend about a third of your life in retirement. Retirement planning seeks to ensure that you do not spend a third of your life in misery. It also helps us to achieve our long-term dreams and prepare for the financial reality of retirement.
What is retirement planning?
This type of planning is an amalgam of social, psychological and financial preparations for the period when you will no longer be in full-time employment. These days, the definition of "retirement" is getting broader because many retirees continue to work.
That fact doesn't change the concept of retirement planning as planning for your golden years. It doesn't alter the inherent uncertainty of the future either. Planning is multi-dimensional, although primarily financial. It can be perceived as a subset of financial planning that seeks to attain some degree of financial independence at retirement.
Why is there so much fuss about it?
The risk of outliving your life savings (longevity risk) is grave. Also, purchasing power risk and inflation risk make it harder to maintain your pre-retirement standard of living throughout retirement. Greater health risk is experienced, since average life expectancies are on the rise. Retirement planning is vital, because it is designed to be a risk management activity for retirement. Further to this, it can ensure that you have enough hay in the barn to be financially worry-free.
When should you start planning for retirement?
The easy answer is "as early as possible". If you are working or have a source of income, you should start planning now. Retirement planning is not an event, but an ongoing process. The clich "better late than never" applies to adopting a systematic approach to your retirement considerations.
How should you plan for retirement?
The first step to undertaking this activity is to envision your retirement and state specific retirement goals. You should assess how much you'll need to make these goals a reality. Then you will take stock of what you have in place and decide if you are on track or whether you have a shortfall. Take care to identify dedicated retirement plans and separate these from solvent, short-term savings.
Planning requires a bit of ambition and organisation as well. It should not be done with arbitrary targets and figures that do not represent your true desires. A retirement calculation forms a core component of your retirement planning activity. You should also consider the following when planning for retirement:
i) Inflationary pressures during retirement
ii) Health insurance and other protection products
iii) Debt reduction or elimination by or in the early stages of retirement
iv) Retirement products (annuities, pension plans); including options for late starters (reverse mortgaging & single premium annuities)
v) Your accumulated retirement fund and income stream
One important retirement planning rule-of-thumb is that you should plan for at least 30 years of retirement. This is based on two factors. The average increase in life expectancy averages dictate that people will spend a longer time in retirement than before. Also, those who retire earlier tend to have higher life expectancy averages compared to those who retire later.
Retirement planning is all about anticipation, systematic approaches and financial prudence. It can involve all aspects of financial planning as well. That financial approaches tend to dominate discussions on retirement planning is inevitable. However, it must not be forgotten that retirement involves more than money issues. Still, without being financially comfortable, you are likely to be financially susceptible and scraping the barrel.
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