To some people, retirement is something to think about only in the future. But there is no time like the present, and retirement planning should start now because it is a multistep process that evolves over time. For a comfortable, fun and secure retirement, you will need to start to build your financials which allow you to fund it.
In the simplest sense, retirement planning is what one does to be prepared for life after paid work ends.
There are different stages to retirement planning, which changes according to which stage of life you’re currently at. For example, early in a person’s working life, retirement planning is about setting aside enough money for retirement. But during the middle of your career, it could evolve to also include setting specific income or asset targets and taking steps to achieve them.
So how do you start planning for your retirement? Well, it all starts with thinking about your retirement goals and how long you have to meet them.
How much do you need for retirement?
While this number differs from person to person, there is a benchmark in which you can follow to determine how much money you need to save in order to hit your retirement goals.
While there is no fixed rule about how much money to save, many retirement experts offer rules of thumb such as saving about RM1 million, or 12 years of one's pre-retirement annual income. Others recommend the 4% rule, which suggests that retirees should spend no more than 4% of their retirement savings each year in order to ensure a comfortable retirement.
However, do remember that everyone’s circumstances are different, and therefore, calculating the ideal retirement savings is very much up to your own situation.
Here are the 4 crucial steps you should take in order to build a solid retirement plan.
1. Understand your timeframe
Factors like your current age and expected retirement age can help to create an initial timeframe in which you can use to achieve an effective retirement strategy.
For example, if you’re young, you can have the majority of your assets in riskier investments, such as stocks. There will be volatility, but stocks have historically outperformed other securities, such as bonds, over long time periods. The older you are, the more your investment portfolios should be focused on income and the preservation of capital, like bonds which are less volatile and provide necessary income that you can use to live on.
Understanding your timeframe helps you plan for success better, and also helps to determine the optimal allocation strategy for your finances.
2. Determine your retirement spending needs
Having realistic expectations about post-retirement spending habits will help you define the required size of a retirement portfolio. Most people believe that after retirement, their annual spending will amount to only 70% to 80% of what they spent previously. However, such an assumption can be proven unrealistic, especially when the increasing cost of living is factored in. Studies have shown that the cost of living is increasing every year—especially healthcare expenses.
To have a more accurate gauge of your retirement planning, you can specify and estimate your early retirement activities, accounting for unexpected expenses in middle retirement, and forecast what-if late-retirement medical costs.
3. Assess risk against your investments
Whether you’re taking charge of your own portfolios or whether you have someone to manage it for you, a proper portfolio allocation that balances the concerns of risk aversion and returns objectives is arguably the most important step in retirement planning. The main question to ask is: How much risk are you willing to take to meet your objectives?
The most important thing is that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. Never attempt to micromanage your portfolios, because retirement planning is for the long run, and markets go through long cycles of up and down.
4. Make sure your estate planning is up to date
While it is a crucially important part of managing your personal finances, not many people devote enough time to estate planning. Essentially, estate planning is deciding who will inherit your assets after you’re gone. This means that if you don’t have estate planning down, you can’t choose who gets everything that you worked so hard for.
Estate planning is another key step in a well-rounded retirement plan, and each aspect requires the expertise of different professionals, such as lawyers and accountants, in that specific field. Having a proper estate plan ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined plan also aids in avoiding an expensive and often lengthy probate process.
Conclusion
Everyone dreams of the day they can finally retire, but don’t consider the fact that doing so costs money. That's where retirement planning comes into play. And it doesn't matter at which point you are in your life. Setting aside money now means you'll have less to worry about later.
Retirement planning allows you to have enough money to maintain the same lifestyle you currently have. That's why it's so important to have a viable plan that allows you to get the maximum amount of money when you retire.
At SK i-Wealth, we offer a full financial service solution for individuals and companies, including retirement planning services. Our firm’s comprehensive wealth platform and experience supports a team of Financial Integrators with the resources they need to deliver integrated financial solutions according to your needs.
