opinionBy Sola Alabadan
Money will dictate your retirement decisions
More than ever before, every one of us needs to be more serious about retirement planning so as to be able to take care of ourselves during retirement.
When planning your retirement, however, it is important to remember that money, more than any other factor, will dictate most of your retirement decisions. Your level of financial preparedness for your retirement years will determine when you retire, what type of lifestyle you and your family will enjoy during retirement, and what might be left as a legacy to your heirs.
Don't fail to plan for retirement
It has been said that no one plans to fail, they simply fail to plan. Nowhere is this idea more applicable than when it comes to meeting our retirement objectives. A sound financial plan can be the difference between meeting one's retirement objectives and facing the discouraging surprise of one caught unprepared and with too little time remaining to change their financial course.
At the very least, ongoing retirement planning will help you understand the financial demands of retirement, and make those decisions that are best suited to applying limited resources to potentially unlimited demands.
Planning for retirement as self-employed
People who are self-employed do not have the advantage of an employer-provided retirement plan. However, they are not without options for planning for their retirement. Self-employed individuals can choose from a variety of retirement plans including individual pension plans being offered by insurance companies and voluntary contribution provided for under the contributory pension scheme established by the Pension Reform Act 2004. You are therefore advised to consult with your financial advisor to determine which plan is the best one for you.
Increase your contributions if you are an employee
If you are working and already contributing to your Retirement Savings Account (RSA) opened under the contributory pension scheme, you can count yourself lucky. However, this may not be enough to see you through retirement. Use a retirement planning worksheet to project the amount of money you will need to live comfortably during retirement. If you are not contributing enough to your RSA to generate this amount, increase your contributions immediately.
Work longer and reconsider expensive purchases
If you are already nearing retirement age but do not have sufficient funds for retirement, consider working longer. This may not be a pleasant thought for more people; however, each year you work increases the amount you contribute to your retirement plans.
Again, having a vacation home, brand new vehicle or remodeling your entire home may be very tempting; however, if you are doing this in the few years before retirement consider how this will affect your retirement accounts.
Furthermore, if the price will be financed over a period of time how will this affect your budget when you retire - - will you still be paying for this long after you retire. Before you justify that expensive purchase by arguing you have worked hard all your life, take the time to question if it is the best decision for your retirement plans.
Consider retirement income needs
Recent studies have found that during retirement the average person needs between 60 and 80 percent of their pre-retirement income in order to maintain their pre-retirement standard of living. Almost everyone needs less money during retirement than before. How much you need during retirement will be a function of your personal spending habits.
Hopefully you are saving money on a monthly basis for retirement. During retirement you can plan your needed monthly income without factoring in a "retirement saving" amount.
Think of sources of your retirement income
Once you have estimated your target retirement income, you are ready to begin to evaluate what sources of income will be available to you to meet your monthly needs. Generally speaking, your sources of retirement income will be your pension plan and your personal savings.
Many employers offer company sponsored retirement plans. These plans come in many forms but generally can be broken into two categories. Defined Benefit Plans are normally funded entirely by the employer and guarantee a retirement benefit based on a combination of years of employment and employment earnings. A Defined Contribution Plan may be funded by the employer, employee or a combination of the two. The employee owns an account balance (subject to vesting) made up of contributions and earnings. At retirement, the employee decides how they will withdraw the balance they have accumulated.
The most important, and often most overlooked, source of retirement income is one's own personal savings. Savings directed to RSA accounts, directly held assets, home equity, etc. will largely determine how financially secure your retirement years will be.
Diversify your investments and opt for conservative instruments
It is an established fact that no one can guarantee that the investment markets will continue to produce high returns consistently. The most recent economic calamity is proof that the market gives and the market takes back. Even the best financial analysts and economists cannot consistently predict what will happen in the markets. You may be able to mitigate some of your risk with greater diversification and by moving some money to more conservative instruments, but this typically decreases your returns. When you begin to move your portfolio from growth to preservation, you will earn less on your money and you need to account for that in your planning. Higher income producing investments can generate more of a tax burden that should be considered as well.
Subscribe to investment-linked insurance products
Many types of insurance policies are great investments, especially for people moving into retirement. Guaranteed minimum interest rates for the policy result in a guaranteed minimum return for what you have invested. Annuities can provide you with a guaranteed income stream that can help you maintain your lifestyle in retirement or augment your other sources of retirement income. Products such as universal life insurance allow you the flexibility of paying smaller or larger premiums, depending on your financial capabilities. Life insurance is also an excellent wealth transfer tool that can help you efficiently leave a financial legacy behind for your loved ones. When you are evaluating different insurance products, remember to watch out for non-essential coverage, superfluous deductibles, inadequate limits and unnecessary riders.
It should therefore be appreciated that there are many ways that proper planning can improve your current retirement outlook. The more time you have to prepare, the more change you can effect in your retirement income. A sound financial plan and ongoing professional advice can help you obtain your retirement objectives.
The best advice for anyone planning for retirement is to start now without further delay. In case you have not taken any steps to plan for your retirement, do not lose hope because it is never too late to begin.