Retirement is not a race but a marathon. Every financial step in the right direction means additional security for you and your family. Early retirement planning is at the heart of all good financial security.
With the myriad of technical terms regarding finances, it is easy to get overwhelmed by the process. Retirement planning does not have to be nerve-wrecking. Here are 3 sound pieces of financial advice for retirement planning you should take to heart.
Tip #1: Set A Timeframe
Like previously mentioned, retirement is akin to a marathon. In a marathon, there is always a finish line. Something to strive for. Similarly, your early retirement planning begins with calculating the time frame you have to achieve your goals.
A general rule of thumb is that the younger you are, the higher your capacity to take risks for further financial growth. For those with 30 years to spare till retirement, riskier ventures such as stocks are better. Though such investments come with volatility, they have also historically seen higher returns than their safer counterparts.
This is particularly important when you consider inflation. Inflation is the sustained upward movement in the overall price of goods and services in an economy. If you have heard the older generation comment about the exorbitant prices of things nowadays, they are not wrong. A cup of coffee in the year 2000 may cost $1 but in 2020, that very same cup of coffee could double in price to $2. The higher capital you accrue through riskier investments will offset the inevitable rise in cost.
As you age, your portfolio should be devoted more towards capital preservation and income. This means lower-risk investments such as bonds that will be stable, producing safer passive income.
Tip #2: Know Your Spending Habits
A positive mindset is great to have but it needs to be tempered with realistic expectations. Your spending habits in your later years will largely determine the size of your retirement portfolio.
A common belief is that after a person retires, they can consciously cut their spending to 70% of their income. While nice in concept, human nature is tenuous at best and no one is immune to the urge to splurge. Many retirees tend to spend their initial years going on lavish vacations that they have been postponing for years.
Retirees also have an abundance of time to spare after leaving their regular work shifts. This leaves many of them ample time to pursue additional pastimes, which may require more capital.
Rather than chalking it up to willpower, being realistic with your spending goals helps adjust your planning process to better suit your lifestyle.
Tip #3: Protect Your Hard-Earned Money
When talking about retirement planning, the emphasis is largely placed on capital accumulation. Yet one of the most important factors is not on growth but on building a protection plan that ensures your savings are safeguarded.
Unexpected expenses such as illnesses are frequently dismissed as “not going to happen to me”. Yet it is these unforeseen circumstances that will eat into your hard-earned savings in a heartbeat. According to a study in 2017, Singaporeans are on average sick 10.6 years in their 84.8-year average life span.
That’s roughly 12.5% of an average person’s life!
The majority of these illnesses will come into our lives at the most inopportune times, our retirement years. Early retirement planning requires foresight by factoring in medical bills in said plan. Insurance against diseases will soften the blow of such unavoidable expenses, allowing you to live the life you want.
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