Retirement can be divided into two scenarios. The first scenario is calming to envision- you have a steady stream of income and a comfortable standard of living and you’re living out the rest of your days in ease and leisure. But there is a second scenario which nobody hopes to come face-to-face with- you are in the sunset years of your life and there is no steady stream of income & you struggle to meet everyday expenses. Scary, isn’t it?
Where to start?
Everyone wishes to maintain the same comfortable standard of living they had while they held a job even after retirement. So how do you go about this? The answer to this question lies in prudent retirement planning. The solution is to create an income stream for your future-self using your present stream of income. This however is not the easiest task. A lot of thought and planning goes into enabling this. This process of planning for your future income streams is called retirement planning.
Aspects of Retirement Planning
Now there are two aspects of retirement planning- the financial aspect and the scientific aspect. The financial aspect is about what financial instruments you would like to invest in. This aspect of retirement planning is relatively simpler. For starters, you are statutorily required to give away some of your income in the form of provident fund schemes and so on, which are implemented by the firm you work for. These schemes also have tax benefits. On top of this, with a little bit of research, you can find other places to park your investment like mutual funds, government bonds, post office savings deposits and so on. This will be based on your discretion and financial needs. One key aspect is to plan for beyond what you think you may need in the future.
The other aspect, the scientific aspect plays a more important role than most people realise. It involves estimating how much you need to save up, on what basis to divide up your savings and so on. How much you save is also very important. Apart from investing savings, there are two other important things to keep in mind so as to have a comfortable retirement.
Steps to take while planning your retirement
1. Have a budget
The first is to have a definite and properly planned monthly budget. Most individuals spend more than what is necessary when they fail to set a strict budget for themselves. When you receive income that is in surplus of your needs, you should think of investing the surplus in other places rather than use it for personal consumption which is kind of a waste of money. The surplus is to be invested in a tax-efficient investment.
2. Account for Inflation
Another important point to take into consideration is that the rate of returns from this investment should be higher than the rate of inflation. If that does not happen, you are simply losing money.
3. Set aside a surplus of money
The surplus you save all depends on your income and lifestyle. While some are able to live on the bare minimum, some splurge. Any option is fine as long as you are comfortable with what you are setting aside for the future. The size of your surplus should be optimal. Some put aside so much of their income as surplus that their full potential gains cannot be reaped efficiently. And some set aside a negligible amount that will account for nothing in the long term.
4. Create a contingency fund
The next is to have a contingency fund. This is to be maintained separately from your current expenses and savings for your future. It is recommended that a person save up to four to six months’ worth of income as a contingency fund. Ensure that these funds are placed in highly liquid investments so that you can withdraw them as and when you wish. If you have a well-planned budget, planning for a contingency fund is a piece of cake. When people do not have a specific budget in mind, they either end up setting aside too much or too little. Caution must be exercised here.
5. Pre-empt expenses incurred at milestone moments
As you plan your long-term investments, account for milestone moments in life that will require funds. These occasions may include the cost of your child’s postgraduate education abroad, their weddings and relocation costs and unforeseen health expenses among others. Failing to plan appropriately for these instances can take a bite out of a well-planned retirement which will render the whole exercise futile- so ensure you plan wisely.
Overall, planning for retirement successfully is not an easy task. It takes skill, opportunity and most importantly, the willingness to save. Retirement for each individual or family is a completely unique thing. No two entities face the same hurdles, so there is not a definite science to the process of planning. However, keeping certain things in mind can help you have a successful, fulfilling and independent post-retirement life. Remember that you should be the one outliving your money, not the other way round.
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