Retirement: when and how to start planning

 In Blogs

Retirement planning is one of those issues few young people want to bother about – at least not while there are a host of more important matters to plan, such as an overseas holiday, buying a home, getting married, or finishing studies and finding the right career moves. During this time your mind is on a multitude of other issues, and old age and having enough money in the future is a distant planet.

Nevertheless, if you spare a little thought on how you plan to live once your job reduces to a pension, it will help you in the long run. Retirement is a process that evolves over time. And you need to look beyond a company pension long before you reach the end of your official working life.

To bring the importance of planning into focus, you need to follow some valuable rules that will help you align your personal circumstances, lifestyle, and future retirement desires and hopes. It’s not that difficult – there are basically three key areas to look at:

One: Retirement planning starts with thinking about your retirement goals and how much time you have available to meet them; evaluate your current age, risk tolerance, expenses and inflation, and when you expect to retire.
Two: Then you need to look at the types of retirement investments needed to help you raise the money in the working time you have available to fund your future.
Three: Understand the value of consistent investment through the magic of compounding, and the significance of patience, professional guidance, and self-discipline.

Working through these three points may take more time, analysis and understanding than at first apparent, which is why an early start is recommended. Retirement plans evolve through the years, which means portfolios should be rebalanced and estate plans updated on a regular basis – so in essence you should always keep your retirement and what you will need in this time, top of mind.

Set your plan points and keep to the map

Your current age
If you’re young, and your expected date of retirement a long way off, you can take higher risks with your investments. There will be volatility, but you will have time to experiment to a certain extent. However, by the time you’re in your mid-thirties you should settle into a more steady approach. A proper portfolio that balances risk aversion and good return objectives is the best route to take. This is also the time to evaluate how much risk are you willing to take to meet your objectives. As you grow older, your portfolio should be increasingly focused on the preservation of capital and income.

The value of compound interest
Time is a powerful tool when investing. Compounding depends on time and consistency; it is achieved when interest and returns from savings and investments are automatically reinvested in your funds, and then those returns deliver further returns. Allowing returns to compound from a young age is a proven strategy when building up retirement funds. Plan your investments strategically so that you outpace inflation. Inflation is like the antithesis of compound growth, and it erodes the value of your money.

Estimating expenses in retirement
People are living longer and this is a key factor putting pressure on both the building and withdrawing capacity of retirement funds. Retired people will need more income for a longer time, so they will need to save and invest with this factor in mind. Formulating accurate retirement spending estimates is vital to the planning process. Spending in the future is going to require additional savings today.

Company pension and private pension investments
Some people rely solely on a company pension to fund their retirement, but as effective a saving method as this may be, on its own it might ultimately be detrimental to your retirement plans. You may not continue in the company, and the temptation to draw out the money and spend it, is a proven persuasion. So be prepared to supplement a company pension with your own long-term planning investments. A retirement annuity fund (RAF) is a long-term retirement vehicle that is similar to a pension fund, and is highly recommended as a vehicle for wealth building; you are only allowed to withdraw a third of your contributions upon reaching the age of 55, with the balance paid out as a monthly living annuity.

Staying the course in a volatile market
Volatility measures the degree to which asset prices move up and down over time. The larger and more frequent these moves, the more volatile the investment is considered to be, because it is carrying a higher risk. However, it is important to remember that an asset can be highly volatile and still provide strong growth over the long-term. Your goal must be to ensure that you stay invested, and allow your investments and savings to ride out short-term volatility.

The importance of having emergency funds
When you invest and are expected to stay the course for the best results, it may mean that you tie up too much money and don’t leave yourself easy recourse to funds should the unexpected take place – such as a fire, accident, or as recently shown, the disaster of a pandemic. One thing is certain and that is nothing is certain – so it makes sense to ensure you have access to funds to cover such events without cashing money out of your investments. Building up a 3 month supply of expense coverage, and utilising a short-term saving vehicle to do so, is a sound strategy in protecting your long-term investment funds should you need immediate access to cash.

Estate planning is a key step
In a well-rounded retirement plan, you will eventually have to consider estate planning. From the outset you may not have a great deal of assets, but these are naturally expected to grow as your retirement portfolio grows. Estate planning will eventually become a vital part of your retirement plans – and each aspect requires the expertise of different professionals in specific fields, such as lawyers and accountants. Also remember that life insurance is an aspect that plays an important part in an estate plan and the retirement planning process.

Considering taxes
Don’t make this a terror. Taxes are sometimes seen as a make or break issue with a portfolio, but this is extreme. While you need to be careful, you also need to continue your contributions to investments and savings according to a calculated strategy. Determining your tax status when you begin to withdraw funds is another crucial component of the retirement planning process.

Wrapping up: compound, consistent, early

Investing and saving for retirement consistently and through multiple vehicles allows compounding to take place.
Having a healthy balance of both investments and savings supporting your company pension is crucial for retiring comfortably.
While starting early is the best strategy, it is never too late to start saving and investing for the long term.

Many people today are living 30 years beyond retirement. Keeping up with the rising cost of living is key – whether you want to retire early or are planning to supplement a corporate pension. Retiring comfortably is a result of contributing early, maintaining consistency, and allowing your funds to compound over time.

Empfin Solutions – the team that keeps your team happy

We’re an Old Mutual franchise with our primary focus on the three main areas of concern in everybody’s financial planning:
Your Company Benefits – advising on, and servicing umbrella pension and provident funds.
Your Personal Financial Planning and Provision – Estate planning, Wealth Creation and Retirement Planning.
Your Assets – motor and household insurance.

Always striving to be a trusted partner in facilitating financial solutions for organisations and individuals, our dedicated team of fully accredited, experienced professionals have a passion for satisfying customer needs and providing a truly client-centric service.

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