Planning for Retirement: The Basics
Who should plan for retirement?
We hear a lot about retirement planning
these days, but who, exactly, should be planning? How important is it,
really? The hard truth is that everyone who does not anticipate generating
regular income during their golden years should be setting funds aside
now for retirement.
But what if you haven't started,
don't have a lot of money to invest, or simply aren't sure where to begin?
Not to worry. Together with our retirement planning calculator, you can construct
a retirement plan and then determine which investment tools will best help
you reach your goals. Take a look below for information on the basics of
retirement planning and how to get started.
The changing face of retirement
It used to be that retirement wasn't
all that serious a life change to consider: people didn't often expect
to live much past their fifties, and certainly did not view their post-working
years as a time to reward themselves. If medical issues arose or expenses
mounted beyond their expectations, their children tended to assume the
role of caregiver and financial supporter.
Nowadays, however, retirement is
viewed in quite a different light. This is due primarily to the change
in our life expectancy and the belief that some of our best years are ahead
of us that retirement is a time for travel, leisure, and realizing our
dreams. Even if our goals are modest, most of us still do not want to burden
loved ones with medical expenses or worrying about our financial situation.
But whether you plan to travel the
world or simply hope to maintain your independence, your retirement income
will largely depend on your personal contribution that is, your portfolio
of savings and investments. EPF and pensions can be important supplemental
sources of income, but they may not be enough to allow you to retire comfortably.
To preserve your current standard
of living, you must take the task of retirement planning seriously. And
the sooner you choose to begin, the better.
Deciding when to begin
Much like changing jobs, buying a
home, or starting a family, there is often no convenient time to start
planning for retirement. But the sooner you start, the less hard you and
your money will have to work.
The more time you have before you'll
need to access your retirement funds, the more opportunity those funds
will have to grow. As a result, the investment amount needed will be considerably
less.
Whatever your age or financial picture,
don't put off planning for your retirement any longer. Make a commitment
to start your planning now and put the power of compounding returns to
work for you.
The power of compounding
Time is one of the most important
advantages of retirement plans. With the framework and discipline of retirement
plans, you have the potential of realizing significant gains from seemingly
minimal contributions. The power of compounding returns can't be overstated.
Consider the following scenario: Beginning at age 18, Megan invests approximately
RM2,000 to a mutual fund per year over a period of
eight years, and then stops. Sam doesn't start investing for retirement
until age 26, but he invests RM2,000 per year over the next forty years.
Even though Sam contributes RM64,000 more than Megan, he can never catch
up: at age 65, her mutual fund fund will be worth RM1,035,160, whereas
Sam's mutual fund fund will only be worth RM885,185*.
Procrastinating can exact a costly
price when it comes to retirement planning. As the saying goes, time is
money!
* Figures assume a 10% annual return;
figures assume no transaction costs or taxes deducted from the account.
This is a hypothetical example and is not indicative of the actual results
of a particular investment.
The risk factor
You can expect that with any investment,
there will be some risk. And it makes sense, then, that the greater the
risk, the higher potential there is for big returns on your initial investment.
When determining which financial
instruments to incorporate into your retirement plan, consider both the
amount of risk involved and your risk
profile. Are you comfortable with taking calculated risks? Investing
in stocks and mutual fund may serve you well. Or would you prefer a more
moderate or even low level of risk? Then you might want to consider bonds
and money market accounts. Whatever financial vehicles you finally decide
to put to work for you, keep in mind that experts generally recommend a
balanced and diversified investment portfolio.
You should also take into consideration
the amount of time you have to invest; if retirement is 20+ years away,
you might be able to afford a greater amount of risk. If, on the other
hand, you're beginning late and will need access to your money in five
years, you'll probably want to be more conservative in your approach. Our asset allocation calculator will be able to guide you on the suitable investment mix suitable for you.
But it goes without saying that the
greatest risk of all is not taking your retirement planning seriously.
That's a risk that you simply can't afford to take.
Setting goals and creating a plan
Now that you have some understanding
of the basics of retirement planning and its importance, you're ready to
formulate a plan of action. But how?
First, begin by envisioning your
retirement years. Will you want to travel or indulge in recreational activities?
Do you plan to stay in your present home, or will you downscale? What will
your expenses look like? Determining how much you need is essential to
creating a workable retirement plan.
Next, measure the amount you think
you'll need and compare that to how much you can accumulate between now
and retirement.
No matter your age or level of income,
you can protect yourself from most financial surprises later if you plan
now. Planning gives you the power to turn your retirement dreams into reality. |
