Retirement Planning : Part 2

It is a must to consider important factors before starting with retirement planning.

Personal factors:

What is your desired lifestyle? Ask yourself what kind of lifestyle you want to live. For instance, do you eat at expensive restaurants often or eat at home most of the times? So, it is about your daily lifestyle.
Do you have any expensive hobbies now? Do you intend to take up any after your retirement? For example, you play golf very regularly. So, would you play golf even after retirement and spend the same amount of money on it that you currently spend on golf?

So, these are the amounts of money that you need to save. If you would like to have more luxurious lifestyle and hobbies, you would probably have to save more. But if you would like to have a simple lifestyle and simple hobbies, then maybe you won’t require a lot of money after retirement.

Financial factors:

What is the inflation rate? Since inflation rate affects the cost of living, you need to take this into account. The higher the inflation rate is, the more funds you will need when you retire.
What are the expected rates of returns for your investments? So assuming that you want more returns, you will have to make different investments. Do consider the level of risk across different asset classes. Don’t put all your eggs in one basket and make sure that you diversify your investments across different asset classes. Do keep in mind that higher potential returns also come with higher risks. So, you have to be prepare to lose some of the money in the event that the investment does not turn out well.

Time factors:

How many years are left for you to retire? Use this period of time to build your retirement funds. If you want to retire earlier than 60 years, you have to save more. Do consider what if you are forced to retire early due to, say, job loss or health issues.

Therefore, the steps for the process of retirement planning in a systematic way are:

Step-1: Determine your retirement income needs in today’s value.
Step-2: Estimate your available resources. They will include your cash, investments and other income streams such as property rental.
Step-3: Calculate the gap to be filled, i.e, step-1 minus step-2.
Step-4: Review your health insurance to make sure that you are adequately protected throughout your retirement and construct your retirement plan based on your risk profile.
Step-5: Review your plan regularly. Between now and retirement, many things can happen that will impact your plans, for example, deteriorating health, unemployment or a different than expected investment return.

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