- Personal Finance
Be Secure Be Sure Financial Planning for Retirement
A friend of mine used to say that he wished he knew when he was going to die so he could have the perfect financial plan – I think he meant that if he knew how long he had to live then he could manage his money to the last cent.
However, in the absence of a crystal ball, we have the next best thing – the ability to plan. We can take control by planning which will allow us to enjoy the fruits of our labor in retirement and have enough money to last throughout retirement.
Although none of us can know for sure how long we will have to enjoy retirement as some of us will live a short life and some a very long life planning will help you. Here are the four key areas you need to consider as your pre-retirement checklist.
The four questions are:
- When do I want to retire?
- How much money do I need (or want) to have to live on in retirement?
- Where do I want to live when I retire?
- What is my attitude to risk? Am I a risk taker or am I risk averse?
Some more information
When do I want to retire?
The age at which you want to stop paid employment is critical. If you want to stop work early and enjoy an active retirement then there is a shorter amount of time during which to accumulate funds and a much longer time in which to spend your nest egg of savings. Furthermore, during an active retirement you are likely to be spending more money.
But if you like your job and heartily dislike the prospect of retirement then so much the better as you’ll be in work and earning money for a longer time.
It pays to be realistic about your goals and expectations.
The “average” scenario is that you want to retire at 65 and that you will enjoy the average lifespan of 81 years for women or say 76 years for men. Many people live longer than average to be 90 or older, so it is probably wise to plan for a conservative view especially as successive generations live longer.
Plan for your money to last at least 25 years in retirement, and longer if there is longevity in the family genes.
Now that seems like a long time for your nest egg to last. And it is!
How much money do I need (or want) to have to live on in retirement?
The most important point to note here is that the amount of money you will need in retirement will be a reflection of your current lifestyle. Yes its true and it’s the best guide.
Therefore it is vitally important you understand where your money is going today. Most people have a good idea of their income but only a hazy idea of their outgoings. It is only by having a handle on how much you earn and where you are spending it that you are in control and able to make sensible decisions about it.
If you enjoy regular dinners out with wine, you are probably going to want to continue with this type of spending during your retirement. Likewise, if you enjoy regular holidays abroad then, for a time during retirement you will have more time to indulge in this type of traveling and will need to allow the funds to continue doing this.
Conversely, if you are happy with a week or two in a remote rustic cottage, or pitching a tent somewhere, then the money you will need to allocate for holidays will be less.
What this means, is you need to have a clear idea of what you spend now and how you spend your money currently.
During retirement some costs may decrease such as a work wardrobe, car running and parking costs. Some insurances will no longer be necessary. But some costs will increase such as medical care and holidays.
When contemplating retirement I recommend you prepare two budgets – one for your current spending and one with adjustments to allow for a different lifestyle in retirement.
We All Want Our Investments to Go Up All the Time. The reality is different!
What is my attitude to risk?
The risk you are prepared to take with your investments will determine your return.
Risk and return are strongly linked. If you are taking more risk with your money you should earn higher return.
If you take more risk and earn a higher return, then you will reach your goals more rapidly than if you had taken less risk. But you will only do that if you have chosen good quality investments and you can accept and emotionally cope with market going up and down (volatility).
Your risk profile is what level of risk you are emotionally comfortable with taking. As you approach retirement, its important to re-do your risk profile assessment.
The prevailing thought sometime ago was that once you enter retirement you should re-invest your retirement nest egg into the conservative asset classes of cash and fixed interest. However, latterly the approach has been to have a reasonably high proportion of your investment assets in the growth asset classes of property and equities. This helps to guard against the ravages of inflation in a way that investing purely in cash and fixed interest won’t.
How much is reasonably high? That will depend upon your risk profile or your attitude to risk.
Whilst it is tempting to think that you will just put your money in the bank where it will be safe that too experiences volatility which in turn can affect your income. Currently bank interest rates are less than half what they were a few years ago. If all your money is invested in the bank, it can be extremely difficult to have your income reduce by half, especially if you rely on that income to pay the bills.
It is generally accepted that it’s important to spread your assets across the asset classes rather than investing all your money in just one class. By diversifying your assets you maximise growth potential (i.e. returns) and minimize the effects of volatility (the ups and downs of the market over time).
So diversifying your assets is critical to long-term success. Just how you do that and the way in which you undertake it must be consistent with your goals so that you develop a robust plan and a strong financial base for the long term in line with your risk profile.
As time goes by, your portfolio should be monitored to ensure it is adjusted so that it reflects your current needs and goals. Financial planning is a dynamic process and it is not something you should put in place and leave unattended
Where will I live?
Where you decide to put down roots will not only loom large in your vision for retirement, it will also play an integral part in your personal financial plan. Why, because it affects the amount of capital that you have tied up in your home and which is therefore not available for other purposes.
This decision is very closely linked as much to emotional needs as it is to financial needs.
Do you want to sell your existing home and buy something smaller, more manageable, cheaper or closer to the family?
Some want to use their home to release capital to help fund their retirement lifestyle.
You might want to sell your existing home and move to a smaller town where property is cheaper.
Do you want to move into a retirement community?
These are just some of the options to consider and check thoroughly so that you have a realistic idea of the implications both financially and emotionally.
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