Are you prepared for your Retirement?
Most people will say no, that’s no surprise, because to these people, Retirement Planning starts only at the last 5-10 years of their working life. Whatever they have by then will determine the kind of lifestyle they will live during their Retirement. And also a risk factor to consider is that a sudden high expenditure during Retirement will deplete this amount drastically, leaving the future really uncertain…
So should you be noticing this kind of situation, and you do not wish to be in it, then it’s time to take into considerations to a comfortable retirement.
The Factors To A Comfortable Retirement:
2. The Interest Rate
3. The Lump Sum Amount
The First Factor – Time
Time is an important factor because with enough time, you allow the magic of Compounding Interest (Factor #2) to take effect.
If you do not know what is Compounding, a simple illustration will be taking 2 as a multiple for annual compounding and so if you start with a 1 this year, next year it will be 1 x 2 = 2, the year after will be 2 x 2 = 4, followed by 4 x 2 = 8; 8 x 2 = 16 and so forth.
The number sequence as illustrated above will be 1, 2, 4, 8, 16, 32, 64, 128, 256, 512
So you can see how the numbers get bigger and bigger with time. And that’s Compounding!
Just imagine, if you can get the number sequence above, using 10 years to plan, you will be able to get a figure of 512. But if you do not take the opportunity and you only have 5 years to plan, you will only be getting a figure of 16! Notice the difference between 16 and 512 with a difference of 5 years.
Now do you know the Importance of Time?
The Second Factor – The Interest Rate
The Interest Rate is, like explained, used to compound your money together with the Time Factor. This Interest Rate is also linked to the amount of Risk you are going to expect.
i.e. The Higher The Interest Rate, The Higher The Amount Of Risk.
And in reality, it’s hard (but not totally impossible) to have a Multiplying Effect of 2 because that would mean that the actual interest rate is 200% (200% / 100% = 2).
The common Interest Rate range are from the lowest of 0.125% to an average range of 5 – 15% per annum (this range can be for investment product types like Bonds, Unit Trusts and Stocks).
Most people are comfortable with 0.125% per annum because it’s almost 99% guaranteed that you will get it! Whereas for the 5 -15% range, there’s some considerations and convincing involved because there’s no guarantee for this and that you need to let enough time and positive market forces to work together. But generally, both factors should be to your advantage.
Additional Tip: there’s a negative market force that will eat away your Interest Rate and that’s Inflation! So if you are serious in doing Retirement Planning, you should always take Inflation into consideration! How much to take? Easily 3-4 per annum!
So can you imagine if you decide that 0.125% is the best choice but because of inflation of 3%, your money is increasing (oops, decreasing…) by 0.125 – 3 = -2.875%!
That’s why you need to understand why you need to consider a Higher Interest Rate (an amount that you are comfortable with) and working along with a Professional Financial Advisor to achieve this Interest Rate on an average and long term basis.
The Third Factor – The Lump Sum Retirement Amount
This will be the Goal that you want to work towards to. With this figure in mind that you wish to achieve in your Retirement Age, during the Planning Stage, you will be able to assess how near or how far are you away from achieving it.
If you take a simple calculation of a $2,000 per month to last you for 20 years, it will be easily a $2,000 x 12 x 20 = $480,000 that you need to work towards to. If it’s $1,000 per month, it will be $240,000 and so forth.
The Fourth Factor – The Budgeting
This is the part where you take real action in planning for your Retirement! If the Retirement Amount, that you wish to have, requires you to set aside an $X at an comfortable Interest Rate, and you are able to set aside without affecting your daily lifestyle, then you do not need to do any Budgeting. Just be disciplined enough to set aside this $X amount every month and you will have a Comfortable Retirement.
If you do not have that $X amount to set aside, then this is where you need to learn Budgeting. This will be a tough exercise to most as you need to monitor your expenses on a tight basis. Budgeting also let you take sacrifice for a good cause, e.g. no $5 coffee but a $1.50 coffee instead, and you save $3.50 for it. One day is $3.50 and for the next 30 days, you will have an extra $105 to set aside.
With these 4 Factors to help you to plan for your Retirement, I believe, you have more reasons to start doing so today! If you are still unsure of how to do so, you can always engage a Professional Financial Advisor to help you along!
Image Credit: sxc.hu