What is important to you in retirement?
a). having a large asset base or
b). having a consistent income stream.
In order to understand retirement and what is necessary to plan for the decisions you at some point will need to make, you will need to consider these 7 basic questions among many others:
- Understanding genuine income requirements.
- Setting up and prioritizing retirement goals.
- Considering the risks that may affect these goals.
- Identifying how to finance your goals and mitigate those potential risks
- How much should you set aside for health care expenses or emergencies?
- How much do you need to invest to cover inflation?
- How can you enjoy retirement but still leave something for family members or charity?
Those are the big questions with not many available answers.
Independent Financial Planners can help you identify your priorities, but it is much more effective to educate yourself and manage your own portfolio and understand the various commitments you may have to make in order to reach your goals and how to make the best possible use of your financial resources.
Step 1: Understanding genuine income requirements
If you don’t know what it will take to cover your basic living expenses upon retirement, there is a simple way.
Take what you earned last year, deduct how much you saved, how much was invested, the amount paid off your mortgage and other fixed debts that will cease before retirement. The balance plus around an additional 10{830d1043633127e1fb46cc80e8e725429e813d4a1f208e7acb534f94035a1f28} is actually what is required in retirement unless you are prepared to undergo a drastic change in living standards.
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Setting up and prioritizing retirement goals.
Planning for your retirement is very similar to planning for any goal in life.
Understanding how to achieve any goal in life ensures you are on track to achieve them prior to dedicating resources in their direction.
This is why it is so important to have a plan which allows you to focus on the importance of your retirement goals. It is important to understand where you really are now, where you want to be and when you expect to be there.
Retirement planning and living tends to fall into 4 broad categories:
- Basic living expenses (food, clothing, health care expenses).
- Contingency reserves (home repairs, unanticipated health care expenses).
- Discretionary spending (holidays, dining out, leisure activities).
- Legacy (wills and charity).
It’s important to differentiate your wants from your needs and allocate your resources to cover the most vital expenses first.
Step 2: Evaluate the risks
Once your retirement goals have been clearly defined, you need to understand the risks that could jeopardize them. Here are some to consider:
- Market risk: the risk that market returns will negatively impact your portfolio balance.
- Health risk: the risk that your health will decline and cause a significant financial burden.
- Longevity risk: the risk that you’ll outlive your resources.
- Event risk: the risk that an unexpected event will have a large financial consequence.
- Tax and policy risk: the risk that tax and government policy changes will result in additional spending from your portfolio.
It’s important to understand your sensitivity to each of these risks and how you will consider the implications of how your resources will support you in the event of any of them occurring.
Step 3: Allocate financial resources
Retirement resources include your assets, income sources and any products you own (health insurance, life insurance, etc.).
These retirement resources can be grouped into 1 of 3 categories:
- Guaranteed income: income you can count on, such as pensions or maybe Superannuation payouts.
- Liquid investments: financial assets that can fluctuate in price, such as stock and bond funds or other savings.
- Additional resources: nontraditional sources of income, such as rental or part-time income, and other products or property that have value, like real estate and insurance coverage.
Its important to add here that using one resource to mitigate a risk may actually increase a different risk.
A sound retirement plan balances the benefits and trade-offs from your lifestyle choices while staying focused on achieving your highest-priority goals.
When you consider your retirement with these factors, you may identify that you would be more comfortable spending less early in retirement so you can afford premier in-home health care for extended time later in retirement. Or you may decide that you want the flexibility to pay for traveling earlier in retirement knowing that you’ll be able to afford basic health care later in retirement.
Why it’s so important to start preparing today
Prioritize your goals, evaluate risks, and understand the resources you have at your disposal.
Each person’s circumstances, resources, and concept of financial security are different, so it’s important to customize your retirement plan to suit your situation.
Beginning the preparation for retirement now, means that from today onwards, you will still be able to continue kicking your financial goals for the next 20 years or so safe in the knowledge that your future will be safe rather than remaining unknown as a result of lack of planning. Understand if you delay the process for a couple of years, it’s not the benefit of those years that you are loosing, it’s the accumulated compounding effect of the last couple of years
Unlike most other planning, you cannot get better at it each time you retire, you only have one shot.
It’s the best start you can give to your retired self.
Retirement means rehiring yourself as your financial manager.
