Blog: How to plan for retirement
It is one phase of life that all of us actively think about, perhaps worry about and the wise ones among us prepare for – retirement!
The word conjures up a feeling of anxiety for many because most of us are not good at dealing with uncertainty; and retirement is everything that uncertainty is all about. With the cessation of regular income and onset of health related and aging issues, any amount of preparation could feel too less. How does one handle retirement though?
Most of the apprehensions or problems related to retirement can be mitigated with a certain amount of preparation to plan for whatever is in our control. A thorough understanding of the importance of financial planning and regulating post-retirement spending habits could broadly make the path easier. Here are some of the fool proof ways in which you can plan for a comfortable retirement.
Start planning now, if you haven’t already – Now is already late. Retirement is inevitable for most of us. You can start small and keep increasing the amount as you grow in your career and as you become more financially stable. You can speak to a trusted financial planner and devise a plan most suited for you after a clear understanding of your goals, needs and resource availability. Investments in Insurance policies, SIP, Tax-free bonds, investment into a good health insurance are things you should consider seriously at a very early stage.
Harness the power of compounding – Compounding is about exponential growth of your investments as against linear growth. The capital and the interest accumulated works towards additional earnings over time and grows exponentially. To give a simple example, investing $1,000 at an interest rate of 4% p.a. compounding interest means that at the end of year one, you would have $1,040 in your hands. In the second year, you would be earning interest on a balance of $1,040 – or in other words, you would be earning interest on both your initial savings plus the interest that those savings have already earned. Over years, this would grow to huge numbers thanks to the power of compounding.
Have an understanding of your retirement needs with a bias towards overestimating your needs – Retirement is an expensive period in life. As per experts you would need anything between 70 to 90 percent of your pre-retirement income to maintain the same pre-retirement lifestyle. That is a lot when you do not have a steady income and when the needs remain pretty much the same. In fact, post retirement with advancing age, the medical expenses could keep increasing as well.
Make good use of retirement plans that are initiated by your employer – The pension and insurance deductions made by the employer are usually automatic deductions from your salary. In such cases your deductions and hence the investment happens without you really feeling the pinch of it. Most employers also give the option of increasing the investment through additional deduction if you so request. This is an excellent way of bettering your investment quantum and benefiting from the power of compounding.
Talk and read up well to understand how your investments work for you and keep your knowledge updated always – Information availability has never been better than it is now. You also have access to dependable experts in the field of retirement planning. The only thing you have to then do is allocate time to understand and upgrade your information. The time you spend on it itself is an investment. You have to be disciplined in spending some time daily or at least weekly in tracking your investments, read up the new laws of your state and reallocate your funds if required and if it makes more sense to do so.
Have a clear understanding of basic investment principles – Yet again with the vast amount of information available at hand now, it is imperative for you and your future to understand the basic financial concepts even if our core skill does not involve finance. You need to understand the rudimentary concepts of diversification, risk appetite, inflation, taxation rules and taxation benefits thoroughly. This would help you to collaborate with your financial planner in making informed decisions if not independent decisions.
Keep your family and spouse in the loop and be transparent with information – Life is uncertain and what makes unfortunate eventualities like disease or death even more miserable is a lack of awareness about the finances of the family. It is important hence to keep a clear record of your investment details accessible to all the relevant members of the family. The last thing someone wants to deal with at a time of a family crisis is to grapple with lack of information on your medical insurance or being surprised by the fact that you are underinsured. When family is part of the planning, the plan itself would benefit from the combined wisdom of all involved.
Never dip into your retirement savings – There might be unplanned emergencies that come in for which you are not prepared or be underfunded. The first temptation and tendency would be to dip into your savings. When you withdraw from retirement savings, you not only lose the principal and interest but also the tax benefits associated with your funds and even attract withdrawal penalties. Even when changing jobs, it does not make sense to withdraw from the investment plan or close it. It is better to roll it over and move it your new employer’s plan.
Learn and adapt – Never be shy of learning new things, exploring and asking questions. The financial markets are coming out with an endless amount of products and plans which could make better sense for your investment goals. So consistently checking on them, learning and asking your financial planner pertinent questions could help you maximize the returns you make from the investment. Complacency is the worst thing for your investment. Changes and adaptations should be made as required even if your professional demands on your time are excessive. If you don’t spend time now, when you are retired and have time to look at all these, you will have to make do with insufficient resources.
Bring down debt to the barest minimum – It is ideal to be debt free by the time you retire. If that is difficult, the endeavor should be to keep it to the barest minimum. That bare minimum should be amply provided for, for the entire duration the debt is expected to exist. Debt very surreptitiously eats in on your funds and regular income which is very important in your golden years. Servicing a debt gets harder without a salary or profits from your business. It is important to have a clear idea of your planned retirement age while contracting loans of any kind and to take care to have them finished before you retire.
Retirement planning is something that needs a lot of investment of time and energy. What I discuss here is however very broad based and you can always contact us at finsight to plan it for you in detail. Additionally, if you are looking for some help in preparing yourself or your team through professional development programs, or you want to read through more self-improvement articles, do write to us at harish@harishrao.world to know how we can help you with it. We would love to work with you on this or any other business coaching needs you may have!