What is Retirement Plan?
Retirement Planning refers to allocating a certain amount of savings or earnings for retirement purpose but the word retirement is itself multi-faceted.
For some, it may focus on financial independence after the age of 60 or it might be a dream of buying a huge house or traveling the world.
The emphasis on retirement planning changes with different life stages. In early work life, it is about setting aside enough money for retirement. During mid-career, it may include setting income and asset targets and taking steps to achieve them. In the last few years nearing retirement, financial assets are more or less determined, and so the emphasis shifts to non-financial i.e. lifestyle aspects.
So basically, retirement planning is done to be prepared for life after you are done with working to earn.
Why plan for Retirement?
We are all aware of the concept of what is available for AED 100 today will not be the same amount tomorrow because of inflation as well different other factors but if we stay invested today keeping in mind future inflationary changes as well as these factors, we can very well plan a wealthy retirement as well as support various goals such as.,
- Child Education
- Children Marriage Planning
- Protecting family from medical Emergencies
- Family Security
- Maintaining high standards of living
One of the crucial reasons why you should save for your retirement is because it is your life. The amount of money you save for your retirement has a great impact on how your life is lived. Retirement is generally the best time to meet your goals and turn your dreams into reality.
Another important reason to save is for your children and family. People who are unable to plan and save money for their retirement put a huge burden on their families.
Saving for retirement also ensures you are well taken care off. This is important in terms of health. There comes a point in everyone’s life when his or her health starts to worsen with age. While you may be able to live on your own and care for yourself when you first enter into retirement, there may come a point in time when you can no longer do so. Here comes the question – Are you financially prepared for long term care? The cost of long-term can be expensive and it should be included in the cost of your retirement; therefore, you should start saving now.
Another one of the many reasons to save for one’s retirement is that one may not work for long keeping in mind one’s age and health. It is highly unlikely that one will be able to work until they die. That is why one should start saving for retirement, as one cannot generate income for oneself forever.
Finally, social security benefits are great, but they will not cover all of one’s retirement living expenses. Many financial advisors state that a person needs around 70% of one’s current income to live comfortably in retirement. Unfortunately, most individuals only receive about 40% of that from social security benefits. Depending on how much one has contributed through the payment of taxes, that amount may be lower. Since one cannot rely on social security benefits to survive, one needs to start saving for retirement.
Avenues for Investments:
- Equity Markets: One can invest in equity markets and create long-term wealth for themselves by staying invested in quality stocks as well as gain profit from long-term equity holding capital as well as tax gains. A well-diversified portfolio can be made taking care of the investment as well as Risk objective of the investor.
- Bonds: As we know bonds markets are based on corporate and financial institutions, but one can benefit from investing in bonds through Mutual funds which have dedicated funds consisting mainly of investments in different bonds.
- Mutual Funds: There are various institutions which provide professional guidance to retail investors through investing their money in different funds having their own investment as well as risk objective. These investments can be done through lump-sum as well as SIP (Systematic Investment Plan) route and can benefit the investor in long-term.
- Real Estate: Real estate is one such avenue which has provided abnormal over the past two decades and will continue to do so as the disposable income of middle class is increasing every year and the demand for real estate can see a major boom in its sector.
- Start up’s: Recently a trend has appeared where a lot of young investors are investing in start-up companies to gain returns in the near future as well as be part of such companies which will be one the pioneers in their industry in coming time. These investments can provide fixed income opportunities and can be considered as a great opportunity for retirement planning.
- Reverse Mortgages: This investment method is apt for those who have a lot of real-estate but not much free cash. The owner of the property keeps his property with banks as collateral and receives monthly/quarterly or lump-sum payments and can treat it as a fixed income for 15 to 20 years. Further, they can redeem their property by paying off the amount with an added interest or sell off their assets to the bank.
Retirement planning tips
They say “age is just a number” but in reality, it is much more than that, it is an ever increasing evil. With age, come greater responsibilities, liabilities, and stress. Therefore, it is necessary, but speculation dealing with every option of retirement planning leads to confusion to a commoner.
To counter these speculations some of the tips one must keep in their mind are mentioned below:
- Begin investing as early as possible and allow savings to grow by compounding: starting early will help an individual to generate a good amount of corpus, as compared to a person who starts investing later. Therefore procrastination in retirement planning will lead to loss of time and money.
- Sign up for a term insurance: Death is an uncertain event, hence life insurance is vital for and individual and his family’s future. A person should buy a suitable plan that suits his/her needs by an early age i.e. 25-30yrs of age. The sum assured that a person chooses, must be at least 10 times the annual income of the proposed, so that their family can deal with rents, loans, and child expenses etc. comfortably.
- Sign up for a sound investment plan: During the 25-30 age, one ought to put most of their investment in equity (60%) and rest in debt (40%). But with increasing age, the share in equity should decrease so that any short-term losses may be avoided due to equity planning.
- An appropriate health cover: Health plans are like life insurance, forms a major part of retirement planning and should be purchased at a young age so that one is less bothered as they grow old.
- Consider inflation: Taking inflation into consideration is crucial before planning for retirement because inflation may rise and fall but never vanish. Assume an average rate of 5-6% in inflation before planning for your retirement. This way, one can prepare very well for any economic fluctuations that may arise over the years.
- Reconstruct your investment portfolio: regular monitoring of your investments is necessary to know how they are performing. If you are suffering losses, reworking on investment and exploring other options should be considered.
- Getting rid of outstanding debts: Planning your debt, liabilities, and EMI is essential so that one’s retirement is free of all debt. Pay-off all your loans before reaching mid-age. This will ensure your money remains yours as you retire.