Further, as your age increases, there is a need to set aside money for growing medical expenses and possible emergencies. Retirement is also the time to fulfil goals that you perhaps have not had the time to do earlier, such as travelling or cultivating a skill. With a robust retirement corpus, you can finally fulfil these goals.
Finally, efficient retirement plan should also account for inflation in order to ensure that the purchasing power of your money does not erode. If you are contemplating building a retirement corpus, here are seven easy retirement planning steps to make your life easier.
Step one: Set a retirement age
As a thumb rule, the age of retirement is 60 years. But some may want to retire earlier such at the age of 50 or 55. This is a matter of choice. For example, if you are 25 and want to retire at the age of 55, you have 30 years to meet your retirement goals. When you plan your retirement goals with an age in mind, it is easier for you to make investment accordingly. Thus, by the time you reach that age you have an adequate retirement kitty in place.
Step two: Set a retirement corpus
The second step requires you to determine a corpus you need to lead a comfortable retired life. To arrive at this corpus, you will need to take into account your monthly expenses across various categories and determine the amount you require. Two things to be kept in mind while doing so are:
- Making an estimate of how much money you need based on your current lifestyle and your future goals.
- Taking into account inflation to calculate how much the present amount will be at the time of retirement. This is called calculating the future value of money.
Step three: Start your retirement planning early
When you are young and just beginning you career, retirement seems aeons away. Thus planning retirement at an early age may seem overly cautious. This is because you believe that there is a lot of time in hand. This is however, a crucial mistake. The later you begin the more further you may be moving away from your goals. On the other hand, when you begin early, you benefit from compounding. The longer you remain invested, the more compounding power works in your favour.
Step four: Cut down unnecessary expenses
There are many distractions around us these days that lead us to believe that we must have all that we set our eyes on! Reckless or careless expenditure can mar your retirement plans. However, if you can cut down unnecessary expenses, you can direct a greater amount of money towards your financial goals and have a carefree retirement.
Step five: Keep overall financial plan in mind while planning retirement
Building a retirement corpus does not mean that you need to make investments for retirement alone. There are several other financial goals you need to take into account while investing. Two important aspects of a financial plan that are often neglected are insurance and an emergency fund. Firstly, ensure that you have an adequate life insurance cover to secure the future of your loved ones after your demise. Secondly, build a contingency fund that is able to meet at least six months of all expenses, lest life throws you a curveball.
Step six: Seek professional help
Let’s face it. With so many investment options available, choosing the right instruments that are a match with your retirement and other goals is difficult. Additionally, without adequate knowledge, you may be making investment mistakes that can cost you dearly. It is thus best to opt for the services of a financial planner who can help you develop a bespoke financial plan that is best suited to your needs. Most importantly, a financial planner can help you identify financial instruments that are based on your risk appetite or your tolerance for losses.
Step seven: Track and review periodically
Building a retirement plan based on your risk profile is not enough. Retirement is a long term goal. Thus, it is mandatory to monitor and review your retirement plan at regular intervals to see whether your investments are meeting your goals successfully. Further, any change in your life circumstances such as increased income, expenses or changed relationship status must be incorporated in your plan for investments.
Now that we have laid your retirement planning in seven easy steps, you can consider beginning the construction of a retirement portfolio if you do not have one yet.