As humans, we possess the ability to look into the future and make provisions for it. This ability is particularly desirable for us in ensuring the continuity of our existence, but the sad truth is that, most of us get caught up in daily tasks and struggles, giving little or no time for planning and preparing for the future.
Consider the thought of having to plan for thirty to forty years into the future, this may sound like a really daunting task especially when you realize how much effort it takes to plan for a vacation for just a couple of weeks. Retirement planning, is a long term activity which requires making provisions for one’s retirement by putting away funds today for consumption in the future.
Retirement planning is a very crucial task since it allows any individual to meet his or her current expenditure needs even at retirement. It also saves a retiree from serious financial difficulties and drawbacks during retirement. The idea of financing your retirement does not lend itself to any straightforward approach but rather, a series of complex procedures to ensure that the purchasing power of your savings is not eroded.
Retirement needs vary from maintaining your current standard of living at retirement, affording some luxuries such as a vacation or even ensuring that there is sufficient funds to survive a healthcare crisis at old age.
Retirement planning is a careful and thoughtful process that should be approached with great care and knowledge to reduce the risk of disappointment once a person retires. It involves allocation of enough savings, income or revenue to cater for ones needs during retirement.
One of the most amazing things about retirement planning is that – the younger you are, the more distant your retirement and thus the greater your ability to compound your returns over time.
Nonetheless, most people who take active steps to prepare for their retirement are sometimes faced with numerous mistakes that have greatly hindered their ability to reach the desired retirement amount.
In this article, we will look at some of the common mistakes to avoid when planning for your retirement and some key notes to help you plan your retirement.
In planning for your retirement, retiring on time should always be your central focus and it should direct you in making your retirement decisions. It is also very important to consider, how much desired income you plan to have on retirement to help you maintain your current lifestyle or even have a more comfortable lifestyle than you are presently living. All these among others will enable you to properly estimate your retirement needs and allocate funds needed to enable you meet these future expenses.
In retirement planning, making unrealistic predictions about expenses in retirement is one of the commonest hindrances to enjoying a smooth retirement.
Most working individuals, are of the notion that, retirement involves spending less than they currently do. This idea is warranted by the reduction in certain expenses in a person’s working years such as payment for daily commute, spending on our working wardrobe or lunches. Even though such expenses formed a huge portion of the retirement planner’s expenses in their working days, other significant retirement expenses such as health expenses may replace these overheads.
Predictions as to how much money will be needed to cover basic expenses should be done realistically while taking into consideration inflation and other factors that will take a toll on a person’s purchasing power at retirement. This is important because during retirement an individual is still faced with the option of shopping, travelling or eating out and other expenditures that are incurred as a result of spending the entire 24 hours by one’s self as opposed to being in the office.
The assumption that you can still work in your seventies is a mistake that can greatly hinder your retirement. Most individuals enter into retirement at the age of 65 with some even retiring at 60. In retirement planning, you must therefore look into the long-term, set a realistic age you can consider retiring and make provisions for it.
Impact of Inflation on Retirement Savings
Inflation and other indirect costs if not considered when planning for retirement may turn out to be very disastrous. Health care costs arising from dental, vision and hearing should be given particular attention since they are usually not included in health insurance schemes but old people usually suffer from one or all of these illnesses. Inflation should also be accounted for, to protect the purchasing power of the desired income for retirement.
Future inflation has an effect on the amount that one expects to accumulate by the time of retirement. This is because a cedi today is not the same as a cedi ten or twenty years’ time. We need to bear in mind that the expected expenditure for today is used to project the expected expenditure for the future and should be increased by a certain percentage to cater for future inflation. In other words, inflation will eat into your projected future investment and must be a factor in the determination of how much one expects to spend during retirement.
This will bring to mind the need to invest contributions in a retirement fund and not just save them in a bank account. Savings will only ensure the protection of your money and usually do not provide rates of return sufficient to compensate for inflation.
The avoidance of these common mistakes by most people saving for their retirement will ensure you achieve your desired retirement goal. In the second part of this article, we will look at some factors to consider to ensure you properly plan for your retirement.
Retirement planning will require you know how much you will need to maintain your current lifestyle at retirement. This will not only smoothen out your retirement but minimizes all financial difficulties you may encounter during retirement. Your current lifestyle will be a better measure for making projections of how much money you would require at retirement to enable you do what you do currently even after your retirement.
The next thing to consider will be how different you want your life to be during retirement. For instance, if you work a morning to evening job with no additional hours spared to engage in your leisure, retirement will be the perfect opportunity to change this lifestyle and provide you more hours to engage in activities such as gardening, shopping and travelling.
Developing an Asset Allocation
Develop a proper asset allocation strategy both before and during retirement. Asset allocation will detail the percentages of your investment income to allocate to various assets in our retirement plan portfolio. Ideally, most retirees before their retirement will allocate 60% of their income into stocks and 40% into bonds and other fixed income securities and use a reverse in retirement. This rule of thumb, will be essential to provide a perfect balance to cushion you towards a sound retirement without any financial headaches.
The use of a professional to manage your savings fund will prove very helpful considering the cost that comes with maintaining a suitable portfolio that is in line with your investment goals. This is preferred by most people because it relieves them of the stress of having so much to do while going about their daily activities. For people who are not into finance we recommend that you get a professional to manage your investments and also help you to plan towards a comfortable retirement. Usually a professional will charge some fees to manage your funds but may also make you enough money to cover those fees charged.
Retirement is a very crucial period in any individual’s life, it is therefore necessary to allocate much care and attention to save you from any surprises when you finally get there because the truth is that you will soon retire and face the realities of retirement. Plan your retirement today, start investing now.
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Omega Capital Limited is an Investment management, private equity and investment advisory firm. The Company is authorized and regulated by the Securities and Exchange Commission of Ghana.
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The opinions and estimates herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.