Week ended 04th April, 2014
CUSTOM FIT RETIREMENT PLAN
Quote of the Week: “Whether you are just entering the workforce or nearing retirement age, planning for the future is critical.” ~ Ron Lewis
Having looked at the seasons of an investor’s life last week, we appreciate that there are several economic unknowns for those who are many years away from retirement, including market returns, inflation and personal life circumstances. It is simply not possible to make reliable predictions many years into the future.
However, these uncertainties should not prevent successful retirement planning. Instead, we should adapt retirement planning in all stages of life.
For those just starting out, retirement planning is generally the easiest. There is no need to evaluate whether you are on track to meet your retirement goals because you are just starting. While assumptions can be made about future inflation, market returns and expenses in retirement, such forecasts are usually of limited value given the high likelihood of errors. Furthermore, it is nearly impossible to make reliable predictions about whether your home loan will be paid off before retirement or what other debts you will have during the period in question.
For those in their late 30s to early 50s, retirement planning takes on a few added dimensions. While it may still be difficult to reliably estimate retirement expenses a couple of decades into the future, mid-lifers now have more information to evaluate. For starters, we can now assess whether an individual is on track with their retirement savings. In addition, mid-lifers know more about their debt. They may be able to estimate if they will have paid off the mortgage and other debts before retirement. They are likely to have a better idea of the trajectory of their career and income. Mid-lifers also know how they handle finances and investing, both of which are key factors in successful retirement planning. While this information may not fit nicely into a retirement calculator, it can significantly shape planning for your golden years.
For those within 10 years to retiring, planning should get far more detailed. Unlike retirement planning 20 to 50 years earlier, near retirees should begin to focus on actual expenses in retirement rather than using income as a proxy. Depending on circumstances, retirement expenses may be significantly less than what a near retiree is earning. This is because there is no need to save for retirement during retirement and in addition, many people may have paid off their mortgage and other debts by this time. Those nearing retirement should be armed with the information necessary to fine tune exactly what they will need when they accept the golden watch and punch the clock for the last time.
At this time, there is a clearer picture of the retirement savings and evaluating whether you may have fallen behind or have more than you will need. This will give you a guideline to begin to make the necessary decisions in light of the accumulated retirement savings.
As has been emphasized earlier, retirement planning is not an exact science since the driving factors are constantly in a state of change. However, we can use the information available to us in each stage of life, and the advantage of the mandatory pension contributions, to make reasonable assumptions and choices to better prepare us for our golden years.