In last month’s column I covered how to plan for your children’s education. This month I will focus on an equally important subject — your retirement. Most people look forward to their retirement, a time to relax and enjoy the fruits of your labour, to travel, to spend time with family. But these dreams can be dashed if you do not plan for your retirement. When you start work after school or college, retirement seems an awfully long way away, and due to this it often gets forgotten about, or at the very least not given the priority it should be given.
When we talk about retirement planning what do we really mean? Simply put, it is having a fund of sufficient size that when you choose to stop working, it will provide you with enough income to replace the money that you were being paid to work. This income can be made up of many factors, and I generally recommend that it does come from a diversified range of areas, but all of these factors have one important element that we have no control of, and that is time.
Time has a way of disappearing before we know it, and of all the factors involved in planning for your retirement, time is arguably the most important element to consider. This is because with time you have options to plan. For all the factors that need to be considered, time is one element that is a constant that we know will pass and can be planned around. For example, if we look at ten years, it seems like a relatively long period, and while a lot can happen during this time — for example, consider where you are now, compared to where you were ten years ago and then to where you may be in a further ten years, it is likely that your life looks very different.
However, if you look at ten years by the number of pay cheques you are likely to receive, and if we consider the norm — that is getting paid once a month, then it is only 120 pay cheques. And from this money there are a lot of demands on it — a roof over your head, food to eat, clothes etc. After all this is taken care of, only then can retirement be planned for, which is why if often gets neglected, or does not have sufficient resources allocated to it.
This can amplify the problem, as the longer retirement planning is delayed, the more resources are required to generate a sufficient fund, and often there are more calls on that precious income, a family for example. As a general rule of thumb, for every ten years of delay in starting to plan, you will need to double the amount of savings to achieve the same size of fund in retirement. This is due to the power of compounding — generating growth on growth, and is a key factor in maximising the fund value.
While I have focused on time through this month’s column as I believe it is a key factor in planning for your retirement, once you have started the process there are other issues to consider, such as how much to save, your attitude to risk, and where your contributions should be invested.
As with all aspects of financial planning, the key to building a successful retirement fund is to formulate a plan, review the plan on a regular basis, and adjust as necessary. Your financial adviser can assist you to find the best solution for you and make sure it remains that way over the course of your career.
James Thomas is Regional Director at Acuma-Independent Financial Advice. Opinions expressed are his own and do not reflect those of Gulf News.
