Our lives as human beings pans out in defined stages. It is a known fact that we are most productive when we are between 18 and 65 years. Most people that are 65 years and above are either retired or are about to retire. Let us face it, there comes a time when the human body just can no longer withstand the rigours of active employment or service and when that happens, retirement becomes a necessity. However, without proper planning, the years following retirement could prove to be very problematic or even traumatic as the weakness of old age sets in and income sources become diminished.
Proper planning for retirement is an absolute necessity if one is not to become a burden to one’s family and the society. So what is a retirement plan? A retirement plan is a carefully designed scheme of an individual’s personal finances that is aimed at achieving financial independence and therefore wellbeing after one has retired. A retirement plan is essentially based on a projection of an individual’s income and expenditure profile into the foreseeable future as it pertains to achieving financial independence. In planning for retirement one takes into cognizance all necessary financial indices and factors such as the assets, income and expenditure of an individual. All assets such as stocks, equities, real estate, mutual funds, bonds and liabilities such as debts and taxes must be taken into consideration. Financial planning involves elements of certainty as well as probability or unforeseen circumstances.
Ways of obtaining a Reliable Retirement Plan
There are two major ways of obtaining a retirement plan. You could either draw up one personally or secure the services of a financial consultant who would help you draw up one. A financial planner or consultant can assist in drawing up a retirement plan for a fee or commission. You could take an advantage of pension schemes for your retirement plan. However, a word of caution is that most pension schemes end up not delivering as promised due to a variety of socio-economic factors such as changing demographics, inflationary and recessionary trends that often creep up with time. There are government social security schemes, company pension schemes and other private pension schemes. Each one of these schemes require a percentage of an individual’s income as contributions and is subject to stated terms and conditions which at best may not adequately cater for dynamics of socio-economic change in the future. In other words, by the time a person becomes retired, he may discover that his pension scheme is inadequate to cater for his needs. This situation is usually stressful but it is entirely avoidable. It is best to take one’s retirement planning as a personal responsibility rather than leaving it for the government or others to handle.
For those who wish to take personal charge of planning for their retirement, computer-based planning models exist which could assist. The most popular example of such computer-based models is The Monte Carlo Method. The Monte Carlo Method is a mathematical model and it is designed to enable the user forecast the behaviour of investors on the long term so as to facilitate a client’s retirement planning. However, it must be noted that the predictive effectiveness of most existing models is limited to the fact that most incorporate indices of financial domains which currently exist in an attempt to predict how the indices will pan out in the future. This is a serious drawback because future events are essentially uncertain and may not be really amenable to such mathematical treatment.
How Do I Go About Drawing up a Personal Retirement Plan?
First of all, you must make a commitment to save money. The next step is to make a reasonable degree of calculation and disciplined commitment to seeing out your plan. A number of questions need to be asked and answered. Questions such as ‘what age do I wish to retire?’, ‘what standard of living do I aspire to achieve and maintain at retirement?’ and ‘how much do I need to save?’ must be answered. The answers to these questions will further enable you to do an analytical breakdown of your current income and expenditure profile, vis-a-vis how much you will need to save monthly. It is only after all these questions have been asked and adequately answered can a proper retirement plan begin to take shape.
The question of how much money you will need in order to retire comfortably is very critical. In deciding this, it is necessary to make estimates of income and expenditure. A good estimate of how much you will need is to assume that to retire comfortably, you will need at least four-fifths of your current income level. If you have investments, it is a good idea to obtain estimates value particularly as at the time you hope to retire. On the positive side, it is reasonable to take the lower end of the averages in your estimates such as Net Realisable Income from your assets or investments. On the other hand, when making estimates for inflation, taxation and other deductions, it is sensible to take the upper end of your average estimates. You will also need to estimate the value of your social security benefits if your government provides such. As you are making these calculations, keep in mind that these estimates are subject to sudden change which may end up keeping you short of your projected calculations. For instance, inflation might erode the real value of your savings, increases in interest rate might have a similar effect on your investments not to mention unforeseen medical bills and other unforeseen circumstances.
The next question to ask and answer is ‘where will my retirement money come from?’ Essentially, retirement money comes from income from your employment, social security, employer-created retirement plans, your present investments and savings and other sources of income such as inheritance benefits. Upon identifying and estimating all your sources of income you will need to do an arithmetic summation to see if it matches up with your stated retirement expectations. You will now need to look at the various retirements plans available and choose the one that best meets your needs. In doing this, keep in mind that the ‘best’ retirement scheme differs from one individual to another just as our needs and circumstances differ.