Retirement: pensions, policies and the value of planning
Retirement today is different. It isn’t quite what our grandparents experienced. There’s no one who really wants to spend their retirement doing absolutely nothing because they can’t afford anything, and because their pension is too small to allow even a meagerly adventurous or ambitious lifestyle. Doing nothing today is not quite the compensation we used to think it would be after a lifetime of routine work.
Retirement planning involves several steps that evolve over time. To live the preferred lifestyle of comfortable pursuits such as hobbies, travel or business engagement in the so-called retirement years, you have to put steps into place while you are working – and while you are young enough to build the portfolio required to meet your plans for the future. And the first thing you need to know is that your company pension will, in all likelihood, not be enough.
To understand what you need to add to bolster your company pension, and to build the kind of wealth you would need to match your goals, there are a few steps to consider:
Evaluate current age and expected retirement age
- Put quite simply: the younger you begin your retirement planning, the longer time you have to accumulate funds and the higher the level of risk your portfolio can withstand. Riskier investments invariably bring greater returns – but you need the time factor to absorb any shock along the way, and the riskier the investment means there may be a number of shocks along the way. Which is a roundabout way of saying, the older you are the more careful you will need to be.
- Though there will be volatility, stocks have historically outperformed other securities, such as bonds, over long time periods. The main word here is long, meaning at least more than 10 years.
- Additionally, you need returns that outpace inflation so you can maintain your purchasing power during retirement. Inflation erodes the value of your money. Equally, compound interest over time, builds up your portfolio’s worth.
- The older you are, the more your portfolio should be focused on income and the preservation of capital. And as your time horizon changes, you will need to rebalance your portfolio, keeping your retirement goals in mind. You need to decide whether you want a quiet life following hobbies, fishing or stamp collecting – or whether you are going to prefer undertaking the travel you have missed during the saving years. Either way, you will need to develop a budget that matches these different needs, and work towards achieving that. And most importantly, your budget should factor in: health expenses, life insurance, the need for a car, long-term care insurance, etc.
- Remember, with the changes in life expectancy today, retirement planning estimates may need to fund a retirement that could potentially last for three decades or even more.
- A reasonable retirement target date should achieve a balance between the size of the retirement portfolio and the length of retirement it can support. One of the main ways of ensuring a lasting income, is to get rid of all Credit card debt is a huge factor that destroys retirement funding plans.
Evaluate risk tolerance
- If you have a company pension, then it is wise to bolster this with a sound investment portfolio of your own. And to do that successfully, you need to evaluate your tolerance for risk. As you age you should handle your investments more conservatively.
- A bear market with only a handful of years remaining until retirement could cripple your plans to exit the workforce on time. Retirement portfolios at this stage should focus primarily on high-quality, dividend-paying stocks and investment-grade bonds to produce both conservative growth and income. Don’t panic at this point and commit to risky assets with only a few years to go to retirement.
- At any age, however, it’s wise to choose a portfolio allocation that balances risk your risk tolerance and returns. How much risk are you willing to take to meet your objectives? You need to make sure you are comfortable with the risks being taken in your portfolio and to know what is necessary and what is a luxury. Markets will go through long cycles of up and down, so don’t be impulsive, be patient and stick to your plans.
Consult a financial advisor
- Once you reach your 50s and 60s, you usually have fewer expenses: your house is paid off, the kids’ education is done, etc, so you can really focus on your money matters at this stage. No matter how much you think you know about your money, money management is an area of expertise for a relatively few people. This is the time to consult on a regular basis a good planner who will ensure your portfolio maintains a risk-appropriate asset allocation.
- Don’t splurge on bucket-list goals immediately you retire. Live on less, do without, and save more, should be your motto – and this can be done without restricting your enjoyment of life if you use the experience and know-how of a canny financial advisor who will help you devise plans and reach your goals.
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