Retirement is a matter of concern almost for anybody across the world. Once the inflow stops, the reserve runs out faster than realized. And soon, people face a terrible financial situation where they are forced to compromise on things because with age the capacity to earn money lessens.
It is better to plan from before than face a situation like that and be dependent on your children, relatives or worse, state welfare.
Here are a few tips that can help you plan for a situation like that in future.
1. Plan The Reserve Amount Required
Think about the lifestyle that you will have when you retire. The standard will definitely be higher than what it is when you are in your 30s and 40s. When you reach the retirement age, you must have made significant advancements in your career. Naturally, you will be used to living in a certain way. It will be foolish to think that suddenly after you retire, you will be able to downgrade your standard of living. Of course, you will not. So, plan a reserve amount which will be sufficient to support your standard of living then.
And then there is a monster called inflation, which keeps on increasing the cost of living. So do remember to counter in that when you plan a reserve.
Just an example to give you an idea about what we’re talking about. A person who started working in 1975 would have retired about 3 years back. Here are a few comparisons to understand how much that person should have saved to have a comfortable life today. In 1975, buying a house would have cost someone $209,000 (inflation adjusted) which today costs around $275,000 which is a flat 25% hike. Similarly, a new car today costs $31,000 with an average which was only $16,578 (inflation adjusted) in 1975.
2. Start Saving Early
There is no better way to create a corpus than starting early in your life. It is simple math. The number of years you save for your retirement, the more is the reserve amount. So, from the beginning of your career, set a certain percentage of your income aside for retirement.
The CNN financial experts say that if one starts saving $3000 from the age of 25 and saves only for 10 years while investing the amount simultaneously, this $30,000 would grow into $338,000 by the time the person reaches the age of 65. And this is considering an investment growth rate of only 7%.
3. Invest The Saved Money
Saving money is not enough unless it grows to counter the inflation rate. But where should you invest your money? The avenues of investment change as you grow older and move from a young adult to a couple with no children and then on to a couple with children.
When you are young, you have more affinity to take the risk since you have more time to earn back any fund you might lose through risky investments. So, take the risk. It’s that simple.
Every individual deserves their share of taking a risk and you deserve yours too. People grow through this as a person. Trust us.
So, when you are in your 20s and 30s, invest in equity. Invest as much as 80% in equity because although equity is risky, it has historically given solid returns. And it is infectious. If you don’t know how to invest in equity, we suggest you read about it or discuss with friends who know and learn about it.
The older you get, start moving money from equity to debt. Ideally, in your 40s, you should not have more than 40 to 60% in equity and in your 50s, not more than 20 to 40%. Debt is comparatively secured (although it is not fully secured or guaranteed as most people claim it to be).
On an average, today, each middle-income household of US have about $14,000 invested in the equity market while 49% of the total US population is currently invested in the same. If you had invested $1 in the stock market in 2009, you would have made $3 by now, which is a 200% increase. Now think what an investment of higher value would have done with your money.
4. Investment Post Retirement
Well, investment of funds doesn’t have to stop when your income stops. If you follow the above steps, you will be left with a certain amount of surplus when you retire. Plus, you would have received certain retirement benefits as well. Invest the entire amount smartly so that you receive a certain amount monthly for your expenses.
Having said all this, don’t dedicate your life solely into building your retirement funds. Go out, travel, spend money, go into debt, recover, meet people and have new experiences – life is about enjoying the moments lived. All this will make you a smarter person and equip you more to face retirement boldly.