How do I plan for my retirement?

Step one – start right away

ANALYSIS | BOMIKAZI  ZEKA | Planning for retirement is important because it will help you build the nest egg you’ll need to financially sustain your retirement years. Past studies have shown that those who plan for their retirement are more likely to be better off at retirement compared to those don’t.

The sooner the planning process gets underway, the better. This gives your money more time to grow by generating investment returns. And the income from your first job is your first opportunity to save for retirement. As the saying goes: “The best time to plant a tree was 20 years ago. The second best time is now.”

As people can expect to live longer, they must save more for retirement so that they don’t outlive their savings. This is particularly true given that the pensions landscape worldwide has undergone some major changes.

In the past, governments and employers provided retirement income for individuals through government social security benefits and employment-based retirement funds. Because of increasing life expectancies, pension plans that guaranteed a retirement benefit to employees are now rare. Employees are now responsible for making contributions towards their own pensions as well as choosing the investments offered by the pension fund.

Since employers are no longer responsible for funding their employees’ retirement and governments lack resources to provide a universal state pension, each person is ultimately responsible for ensuring they have enough retirement savings. So it’s very important to know the basics of the retirement planning process.

As a researcher, I’m interested in how people use financial products to overcome economic challenges and build wealth. One of the things I investigate is whether planning for retirement leads to better retirement outcomes. For instance, my research has found that individuals whose financial affairs are in order are more likely to maintain their standard of living at retirement.

Given that everyone’s financial situation is unique, it’s always a good idea to speak to a financial planner for tailored financial advice. If you haven’t given retirement planning much thought or don’t know where to start, here are four points to help get the ball rolling.

What are my retirement goals?

Retirement goals make you think about what you want to achieve by the time you retire and what you need to do to achieve it. Some people may have a goal in mind about when they want to retire, or how much wealth they’d like to have by the time they retire. And since wealth has different meanings for different people, others may think about maintaining or improving their standard of living at retirement.

Once you’ve thought about your retirement goals, the “smart” goals framework is a useful guide. It outlines that goals should be: specific, measurable, attainable, relevant and time-bound.

When goals are clear, within reach, achievable, realistic and time-sensitive, they become a blueprint to help you turn them into a reality.

How do I start saving for retirement?

For those who have a job that comes with retirement fund membership, a workplace pension is used to provide for retirement. But there are also other options available to help you save.

For instance, retirement annuity funds are voluntary retirement savings. Personal assets such as unit trusts or tax-free investments can also be used as a savings tool. Unit trusts are generally better suited for people willing to take on risk because their value is tied to the movements of financial markets. In other words, they can generate positive returns but they can also lose value. The drawback of tax-free investments like in South Africa is that they have a lifetime contribution limit. You can’t use them to save more than US$27,400.

Each of these options has its advantages and disadvantages and what works best for one person may not be best for another. But there are several ways to save for retirement depending on your financial situation and retirement goals. Getting professional advice will help you determine what’s best for you.

Will my retirement savings be enough?

Once you’ve set your retirement goals and have a retirement savings plan in place, you can calculate whether you are saving enough to achieve your retirement goals.

For example, if your retirement goal is: “I want to retire at the age of 65 years with an income equivalent to US$1,900 per month” then you can use a retirement calculator to track your progress and determine whether you need to make adjustments to meet your goals.

You might have to increase the monthly amount you’re putting away for retirement or reconsider your retirement age. The retirement calculators are also a useful tool for regular check-ins on your progress should your financial situation change – for example, if you change employers and earn a different salary.

What other issues should I consider?

It’s also important to think about your lifestyle and priorities. For instance: do you aim to retire with your mortgage settled? Are there debts you plan to clear before you retire or children who need financial support at retirement? Would you like to renovate your home? Would you like to buy a new car when you reach retirement age? Another important consideration is healthcare costs. Many people assume that they will be able to work indefinitely and overlook the fact that healthcare costs may increase with age.

Starting early matters

Many people plan to work after retirement age, while others don’t plan to retire at all. It may be that they can’t afford to. They may have accessed their retirement benefits too soon, made inconsistent retirement fund contributions, or had to pay high administrative costs that eroded the final value of a retirement payout.

So best, be prepared. Retirement may seem like a distant event to plan and save for, especially when there are more pressing financial needs. It is important to think about the financial decisions you make now that may cost you in the future. If you start to plan for your retirement now, your future self will thank you for it.

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Bomikazi Zeka is an Assistant Professor in Finance and Financial Planning, University of Canberra