Retirement Planning – Tips to Manage Your Retirement Savings

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 Retirement Planning – Tips to Manage Your Retirement Savings

Summary

  • It is never too early or too late to start with retirement savings
  • A running source of income is always better than a fixed sum of savings, and it is quintessential for an individual to start early planning for his/her retirement
  • One must keep track of his financial progress regularly while planning for retirement

A demographic trend of continuously increasing ageing population has been observed across the globe with medical advancement, progress in a healthy lifestyle, lower death rates and higher life expectancy. For the working class, the need for social security at the time of retirement is essential, given the current macroeconomic factors prevailing in the economy.

It becomes imperative to plan for life after retirement. People who have saving habits and a stable source of income while working are likely to be financially independent after retirement. Being financially independent allows a person to spend the rest of his/her life without any source of income. A financially independent person does not have to worry about his/ her employment. It is about attaining financial freedom by being self-reliant and not being dependent on others.

Retirement planning has been taken care of by the government-sponsored retirement schemes in most parts of the world. However, the burden of providing these benefits to the citizens, are mounting heavy financial burden on the exchequer of the governments across the world. Piling debts on the government due to the economic impact of the deadly pandemic coupled with increased life expectancy is mounting an additional pressure on the economy. Therefore, in several countries, the government of late has started discouraging the pension schemes.

Hence, it is quintessential for an individual to start early planning for his/her retirement by own. One must carefully analyse sources of current income (both active and passive), savings, creating assets for passive income generation through investing in profitable opportunities, and opting for a good health cover along with term insurance. Experts recommend beginning retirement planning as soon as one starts earning, as life is uncertain. However, it can never be too early or too late to start with retirement savings.

Before we get into management strategies of retirement savings, first let us talk about how to save money on a regular basis. Experts suggest a 50/30/20 rule to manage money. This implies that 50 per cent of your monthly earning post taxation should be spent for the needs. 30 per cent of the income should be spent on wants. The remaining 20 per cent of the income should go into savings.

There is no ‘one size fits all’ approach to arrive at a retirement plan. The needs and goals of every individual shall differ. However, a person might face certain challenges in planning for retirement. Some people are not aware of the concept and do not believe in savings. They might even need financial literacy. Some people also regret starting out late. It is important to note that we all have limited time, and the clock is always ticking. The early we plan, the better it will be before us.

Some people do not have access to employer-sponsored saving plans. People often take loans for buying depreciating goods such as a car, mobile phones, gadgets which can create long term liabilities and could burn a hole in their pocket for a long period of time. Financial discipline is a key ingredient to maximise your savings.

Fixed-rate loans can really hurt you in case of falling interest rates and volatile market conditions. Therefore, loan as a product should be taken for creating an asset that appreciates over time and not for something which would turn out to be a liability. In addition, sudden changes in government policies and taxation regimes can cause further carnage. With age, the health care costs, and inflation would rise. The idea should be to maintain the standard of living you are comfortable with. Uncertain and unprecedented events like the pandemic or loss of a closed one in the family could severely impact you both financially and emotionally.

One should, therefore, start immediately relying on the power of compounding. Earnings that are reinvested over a period could create even more earnings. One should also cut down on superfluous expenses, which might not sound a lot of fun.

Creating retirement funds require consistent investing in line with your goals and periodic reviews according to the changing needs. People also sometimes consider redefining their goals based on their incomes and liabilities as well as family commitments.

Assuming that the retirement corpus has been decided, the risk appetite should be adjusted with age. As we grow older, we tend to become risk-averse in comparison to when we were young. Let us discuss some strategies to manage retirement savings.

  • Creating a contingency fund

Investing and saving are two different concepts and people tend to use them interchangeably. Saving is the process of parking money in safe heavens which are liquid such as Bank deposits and could be used in the crucial moments. Liquid funds and fixed deposits can give moderate returns along with the safety of the capital. While investing is about creating an asset, which comes with a certain amount of risk.

  • Consistently evaluating your financial progress

You can keep track of your financial progress by calculating your net worth, which is the total value of your assets minus your liabilities. This would provide you with a glimpse of your current financial position. An increase in new worth over a period reflects your progress. In addition, with continuously evolving needs, the goal and investment should be revised, if necessary.

  • Pooled or passive Investments

Pooled investments such as Mutual funds are managed by a dedicated fund manager. In addition, there are low-cost index funds available which provide diversification of the portfolio. With pooled investments, the investor does not need to worry about timing the market. Moreover, people could start investing in these funds by initiating systematic instalments or lump sum.

  • Buying dividend stocks for passive income

Dividend Stocks are a good bet. Dividends are a proportion of a company’s profits or surplus paid out to the shareholders. Companies that pay dividends, small or big, usually are high-quality businesses with good current financial health plus attractive future prospect, which is what the investors planning for retirement look for- to build wealth year after year. Lots of fundamentally strong and good FTSE 100 listed stocks have consistently paid out dividends in recent years.

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