Steps of Retirement Planning
From Financial Literacy Wiki
Steps to Retirement Planning
After reading the article Importance of Retirement Planning and you are convinced that you need to take action and start planning your retirement? How should you go about doing it. You can take the four steps listed below to help you with your retirement planning.
Step 1: Setting your Retirement Goals
Step 2: Estimate your Available Financial Resources
Step 3: Estimate the Shortfall
Step 4: Investment Plans
Contents |
Setting Goals
Like all planning, you need to set up your retirement goals. For planning purposes, you need to decide the following:
- When do you want to retire
- Your desired lifestyle during retirement
- Funds needed to support your desired lifestyle
After you have decided how much funds you would need to finance your desired lifestyle, the next thing you should factor in is your medical expenses and funds to pay off any loans you might still have when you plan to retire, for instance education loans of your children, housing loans of your property. And preferably have a buffer fund for emergency uses during your retirement.
There are two ways to estimate the funds you need during retirement. The first method is to based on a certain percentage of your last drawn salary. This method is widely used by actuaries as a guide to estimate retirement needs. Indications by actuaries has it that to support a comfortable retirement lifestyle, one would need an income that is 65-75% of his last drawn salary for the first year of retirement. Subsequently, the incomes must be increase according to the inflation.
The second method is to look at your expenditure and compound them forward at the long-term inflation rate.
Estimate Available Resources
After setting your retirement goals and derive the amount of funds you need, the next step is to assess where you are at the moment.
Resources that you might have includes:
- CPF Savings
- Cash Savings
- Endowment Insurance Policies
- Investments like bonds, stocks, unit trusts
- Annuities
- Rental Income from Properties
- Reverse Mortgage
- Proceeds from downgrading to a smaller residential property
Determine Shortfall
After looking at what you have and what you need for retirement, you can now determine the shortfall (if any). Identifying the how much is the shortfall can give you a realistic picture about achieving the retirement that you want. And would affect the plan that you are going to formulate it, to cover the shortfall.
Formulate Plan
There are two plans you need to formulate to meet the shortfall. Firstly, you need to create a savings plan which will tell you how much you need to save each year to achieve the target sum. The second plan you need is an investment plan which will indicate the risk and return characteristics of different investment strategies. The strategy that you choose will depend on what is your investment horizon, net worth and risk tolerance.
