Retirement planning process can be initiated and implemented at any time during one’s working age and before he or she retires but is best implemented if started early. The more the time one has at hand the less the current burden he has to bear in order to contribute to provide for his future. Longer time periods also ensure less amount of current earnings to be saved and more the amount one is able to contribute towards the corpus, more is benefit of compounding that he is going to get. Early start also ensures that one is able to take more risk and hence can invest in avenues which offer higher reward for its commensurate level of risk. This regular contribution with the passage of time will ensure the accumulation of a very large corpus. We discuss below seven essentials one must keep in mind while planning for retirement.
- More objectives can be fulfilled – Planning and starting a retirement planning process early offers a chance to include a greater number of life’s objectives into the plan that he may not be able to address should he start late. Early planning can help one achieve two high value objectives which are very difficult to achieve if one starts late: first, the incorporation of costs of higher education into one’s long term financial plan, which requires increasing one’s productive life during which he will contribute to increase his retirement corpus; the second is the provision for unforeseen medical emergencies which may crop-up at any time in ones life and has the potential to throw any amount of retirement planning out of gear.
- Lower contribution and higher spendable income – An early starter always has the advantage of contribution of lesser amount from current disposable income towards retirement planning compared to someone who would start late. Contributing less of one’s income means that one can spend more on his way of living and lifestyle and would have to sacrifice less for the future. It is an essential objective of any retirement planning process that the quality of life of a contributor should improve as he moves towards the later phases of his life. This objective is best achieved if one starts early as the burden of contribution is evened out among a greater number of time periods and making the effort more sustainable for the contributor.
- Higher compounding – An early starter always has the benefit of achieving a higher compounding effect on his contributions made to the retirement corpus that he has invested according to his risk-taking capacity compared to someone who starts off later in life. Higher compounding means one can achieve a higher corpus while regularly investing a lower sum of money and consequently assuming a level of risk which he is seeking. Higher compounding also means that in later stages of the investment process his returns will be substantial compared to the investments he had made initially, and the current income utilized for living at that time could also be higher than someone who has to set aside a larger sum of money during the later part of his life.
- Wider investment avenues – The investment avenues available to someone who is starting out earlier on in his retirement planning process is also higher. He will have the chance to invest in options ranging from fixed investment opportunities to equities without much difficulty. However, for someone who starts out his retirement planning process later on in his life will be faced with the dilemma of choosing between investment avenues which offer higher returns, which he requires, but is not able to assume the risk of. He will be faced with a dilemma of choosing between investment avenues which have lower risk but with a commensurate lower rate of return which is of little use to him.
- Higher risk tolerance – The risk tolerance of someone who starts out early in his retirement planning process is also higher. Other than age, placing aside a lesser sum of money also makes the risk lower for him. High risk tolerance entails highly rewarding return avenues which will help create a large corpus later. Late starters will be faced with significantly more risks and would also have significantly more responsibilities at hand. Higher risk tolerance also entails that one would be able to bear more losses than someone who is at the later stage of his life. This is usually a significant factor that people take into consideration while making up their mind into parting with their savings with the intention to invest in suitable investment avenues.
- Lower cost – The investment avenues available to an early starter will also be less expensive, since he has the option to invest in avenues which give him lower and safer returns. With these investment options he will also be able to avail of these avenues at a lower cost as they have a cheaper management fees than investment avenues that promise higher rates of returns. Lower cost also ensure that management fees do not eat into the earnings of the corpus more than anything else. In actively managed funds high management fees usually eats into the earnings of a fund which ultimately brings down the net earnings of an investor at par with the returns of a passively managed corpus.
- Option to retire early – A well implemented retirement planning process sometimes gives the option to the beneficiary to amass his target of funds much early than he has planned while providing for all his planned and unplanned objectives. This puts him in a spot where he may retire early and enjoy a comfortable life while not having to worry about his or her finances. Retiring early with negligible financial burden will allow one to adopt a healthier lifestyle than he could while being employed. Early retirement also gives one the opportunity to someone to accomplish something which he had been longing for or planning for but had not been able to do on account of being employed; fulfilment of such objectives can be of great value for someone.
The ultimate objective of a retirement planning process is to ensure that one is able to maintain his or her life at least the same way he or she has been doing while they were in active employment. The above seven points can be a good guide for some one who is about to embark on such a process.
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