With the increasing aging population in the country, and in some part due to a lack of professional personal financial planning during people’s earlier years, there is a huge shift in focus towards proper retirement planning in the country in today.
How does one define proper retirement planning?
Proper retirement planning entails taking into account the likely expenses during your retirement years, determining how much money is for your retirement, when you retire, so as to realistically sustain it. Of course, this is naturally followed by weighing the options available to you, and implementing solutions and means that help you reach and strive towards your retirement financial goals.
“If you fail to plan, you plan to fail” ~ Benjamin Franklin
By recognizing the need to plan for your retirement, the battle is already partially won. There are various ways to work towards your retirement goals, such as investing your monies, saving your monies in retirement or endowment policies, or simply cutting down on your expenditure to ensure that a significantly larger amount is being saved in your bank for retirement purposes. Whichever means you choose however, you cannot neglect the planning process as this allows you to mathematically and rationally determine a numerical goal for you to work towards.
To do a proper retirement planning, the first step is to determine what level of cash inflow would be sufficient for you to retire. If you are unsure of an exact numerical figure, I often find it useful with my own clients to first visualize what activities you would like to partake in during your retirement, the frequency of these activities, and thus derive the estimated monthly costs of your lifestyle during retirement.
One crucial point for retirement planning that is often neglected by finance laypeople or even some finance professionals, is that you should take into account the effects of inflation during the calculation process, since purchasing power for the same level of income would likely deteriorate upon retirement due to inflated prices in the future; In other words, this would likely mean that if inflation considerations were not made, you would not be able to retire with the intended lifestyle that you had in mind following your existing planning process. On the other hand, not everybody stops growing their monies upon retirement, and you have to also take into account the rate at which your monies will continue to grow after you retire (even savings accounts in banks have interest, albeit usually low, will grow your monies).
Next, not everybody ceases to receive income during their retirement years, be it via government initiated policies such as CPF Life, property rental, investment dividends, children providing you allowance etc, and the second step is then to estimate how much these sources of cash flow can contribute to your overall retirement income. Following this, you can get a rough gauge of how close you are to your retirement financial goals by looking at how much you have already prepared for, and how much more perhaps you are in deficit of.
For the ones who have been diligently planning and putting money aside for your retirement, this might be the stage when you realize that if you were to continue with your current strategies, you will be on track for the retirement that you desire. For everyone else however, as well as for those who after more consideration feel that they want to work towards having more for their retirement (either via retiring with more monies or retiring earlier), the deficit that you are able to derive from the previous steps will now allow you to clearly see how much more you need to prepare for. With this, you can examine your various options, and determine for example whether you prefer to take on some level of risk to seek higher returns using investments (and in return having to put aside less of your monies every month for retirement preparation), to commit your monies into insurance policies or investment grade corporate bonds which will possibly provide a lower level of payout but with generally lower risks. This list just consists of possible solutions but are non exhaustive; in fact, the viable strategies and financial instruments to utilise are endless, but it is important to first determine the amount that you need to prepare for, and choose a method (or a combination of methods) that best suits your needs as an individual. Take note that there is no “one size fit all” or perfect strategy as each method has its benefits and limitations, but it is important to choose what is most suitable for yourself based on all considerations.
The steps to crafting a proper retirement plan are relatively easy to understand, but the mathematics and other miscellaneous planning considerations can be overwhelming especially if you are not finance trained. If you are unsure of how to do the exact calculations, it is advisable to approach a professional advisor that you can trust to handle these aspects for you. Needless to say, the later you begin to prepare, the steeper the journey to get to that destination. It is always advisable to begin your retirement preparation and planning as early as possible, even if you have to start smaller early on.
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