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There is a popular Chinese proverb:
Individuals successfully pass through the many phases of life, overcome many hurdles in their long career, witness many ups and downs, and so on. Then comes a time to enter a new phase—Retirement.
It means retiring from work, not life. It is similar to changing from the fast lane to the slower lane where the drive is far more relaxed, scenic and pleasurable. It’s just another phase in one’s life. Moreover, retirement is a state of mind as well as a financial issue.
For most people, the regular income comes in the form of a salary, which is paid monthly. Because of the regularity of income during our working life, we usually adapt our spending to fit in with our income patterns. By the time retirement comes around we usually have our income and spending patterns well practiced, although these may change a little during the retirement phase.
During retirement, or at some stage before, we also need to plan what we are going to do with our retirement savings. Usually this will involve looking at what to do with our superannuation money and any other savings that we may have accumulated along the way. In view of the above facts, it falls on the concerned person to do financial planning in a way he/she not only maintains the lifestyle but also has financial independence.
There are many factors related to retirement planning, and it is never too early to begin. You may define your retirement goals and need to start a retirement savings plan before considering actual retirement. Follow the following four simple steps to arrive at an ideal retirement plan.
Step 1: Decide how much income you require to live comfortably in your post-retirement years. Remember to consider aspects like increased medical costs, expenses and gifts for family.
Step 2: Calculate the amount to be received in lump sum (terminal benefits) at the time of retirement.
Step 3: Select the right retirement plan that enables you to meet your post-retirement requirements. Preferably, choose to invest in asset classes, which can provide you with potentially higher returns in the long run.
Step 4: Begin to make an investment early on so that you have time on your side and enjoy the power of compounding.
Planning Process
The five steps of the financial planning process are:
- Gathering your financial data such as details on your income, debt level, commitments, etc.;
- Identifying your goals;
- Identifying any financial issues or gaps between where you are now financially and where you want to be;
- Preparing your financial plan, which will identify recommended investments and will address your attitude to risk;
- Implementing financial plan—review and revise your plan—to ensure it stays up-to-date and relevant to the economy and changing lifestyle.
Savings and Investments explained
Discovering the correct balance between both Investing and Saving.
Investing and saving and are two linked, but independent, methods. Saving is the process of putting hard cash aside and parking it in an extremely safe and liquid accounts such as Bank savings accounts. Investing is the practice of using money (generally called capital) to purchase an asset that you believe will generate acceptable and safe return over time, making you richer with each year.
When you save, you’re preserving your money for a later time. When you invest, you’re taking some risk that you believe will make it possible for your investment to grow in value over time. While investing can help you achieve your long-term goals, saving is an effective way of managing your money to meet short-term needs and to provide a safety net for emergency expenses. When saving money, the primary emphasis is on the stability of the principal rather than return potential. On the other hand, investors are generally more willing to risk their principal investment for the potential of higher returns.
LOANS vs. INVESTMENT
There is a general confusion among people whether they should avail a loan or build investments to achieve their financial goal (for example, daughter’s marriage). There is no rule which says that either of the option is good, because it differs for each person’s capacity and the nature of debt or investment. The following points are worth remembering.
- It purely depends on your financial strength and other factors;
- Credit card debts and personal loans are very costly;
- If you have a loan with a low interest rate and tax benefits as in the case of home loans, it is advantageous to go for a loan;
- You must be sure that the investment is not risky and will not affect your family if you lose the money.
Personal Net Worth Calculator
Your net worth is simply the total value of what you own (assets) minus what you owe (liabilities). It’s a glimpse of your economic condition. The first step in planning your finances is to know where you financially stand at present, i.e., ascertaining your net worth. Your net worth is the distinction into what you have and what you owe.
Calculate your net worth periodically, say quarterly and keep track of changes. An increasing net worth means you are doing well financially.
Retirement Planning
The conversion into retirement is a unique and dramatic step in life. Yet, the transition into retirement is rarely given the planning or thought it deserves. Everybody intends to run a happy retirement. Without adequate planning it probably won’t happen. People are living longer than ever before, which is obviously good news, but that means retirement is becoming more expensive. So, it is important to plan and be financially prepared once you reach retirement age.
Retirement planning means setting aside of money or assets for the purpose of deriving some income during old age. This is to be done before reaching retirement age. Remember, your aim is to make decisions that will be most effective in helping you realise your future financial goals, based on your current personal financial situation.
Now the critical question arises: How much retirement income will you need?
An easy rule of thumb is that you’ll need to replace 70 to 90 percent of your pre-retirement income. If you make around $2,000 a year (before taxes), you might need $1,500 to $1,800 a year as a retirement income to enjoy the same standard of living you had before your retirement.
