Retirement Planning is the process of savings, and planned investments are made in the early stages of one's working life so that one may have enough disposable income to live a comfortable life when his productive age declines as well as to provide for major unforeseen and foreseen events in life like marriage, education or some major unexpected ailments.
The process across the world is now an established and matured practice. Numerous financial institutions from banks to insurance companies now offer plans which not only promise to take care of the above but promise that after retirement the beneficiary will rest and live a life of comfort and bliss without having to worry about finances ever.
The plans in their entirety not only help individuals provide for their retirement but also help them plan their lives much in advance and live out their lives smoothly. The plans, though different for different providers, have some necessary steps that are similar all across, which have been established after years of refinement.
In practice, however, the most essential factor to consider for retirement planning is how early one needs to start during his working age, followed by how much he or she is willing to set apart and how they are going to invest, but in practice, retirement plans are built bottom side up and involves four steps:
- Deciding on how much income you want on retirement: This is the first and the most challenging step in the retirement planning process. Deciding on the retirement income amount involves a lot of things, primary among them being one's health and the likely expenditure required as one advances through age. Second, the most important thing is to take care of one’s short term to medium term liabilities, for example, one may be servicing on a long term mortgage or maybe paying off an educational loan, in which case his ability to put off a higher sum for savings may be severely limited The third most vital thing to consider is what kind of lifestyle one wants to live post-retirement, the fourth critical need being the requirement of emergency lumpsum amounts for unplanned emergencies and the fifth and the most essential aspect being, the number of dependents one is going to have to take care of after retirement including their health and other requirements.
- Calculation of sums receivable on retirement: The second most important step is the actual number crunching. It would involve the actual rates of interest available on different investment avenues and compounding the returns, so that we arrive at the figures that we have decided upon. One should also focus on the adjustments of time and the monthly amounts to be invested, the life expectancy of the individual post-retirement, as well as the affordability or forgoing of some of the retirement benefits that one is planning for given the current availability and constraints of resources. All the above calculations, however, must also include the element of inflation as the planning is being done on a long-term perspective.
- Selection of a retirement plan: The third step in this process is the selection of a particular retirement plan that fits all the above requirements that have been determined by the individual that he needs after retirement. Different financial institutions offer various programs to suit the needs of a variety of retirement income and other necessities, while some provide single plans covering individuals’ requirements, others offer a basket of products which working in tandem will take care of all of the individuals requirements. Alternatively, an individual may himself build a plan either on his own or with the help of a financial planner or a similarly informed professional, where he would invest in a basket of assets which would cater to his long-term requirements. Another most essential step in the selection of a plan is to look at the levels of risks associated with different investment avenues that one intends to include in his plan.
- Starting it early: A good retirement plan, which puts less burden on an individual and helps him secure better retirement benefits, always starts sooner than later. Also, one also gets the benefit of investing in assets with a higher level of risk and consequently, with a higher return potential if he is able to start early. If one begins late in life, then safety becomes a more significant concern for him, then savings may be the only avenues available for him, instead of going in for a potentially higher return investment avenue which would come with its set of risks. Also starting early and planning one's life ahead early on leads to the achievement of a greater number of life goals, better handling of unforeseen challenges and a comfortable retirement life as has been observed over a long period of time.
There is, however, more to the retirement planning process than just the financial independence part. Retirement should only be a retirement from a job or an active work life and not retirement from all other activities in life. Retirement from a career or a productive work life should also never mean a loss of productivity. For a human being to remain an active individual and lead a healthy life is essentially a non-financial aspect of the retirement planning process.
Post-retirement life should involve moderate physical activity whether with pay or without pay which will keep an individual engaged and keep his mind and body healthy. The above four criteria’s while helping a person transit into a less burdensome life in financial terms suggests no plans on how one must lead a life post-retirement.
It is an observed phenomenon that after retirement, a sense of worthlessness often grips an individual who over a short period of time severely deteriorates his mind and body. It is essential that one realizes that while one can take care of all his or her responsibilities towards everyone and everything else, one can never do away with the responsibility one has towards his own life, and he is responsible for it as long as he lives, taking up a new hobby or objective after retirement gives an individual a sense of purpose and worth.
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