Is Retirement A Dream Or Reality?
Posted on December 10, 2008 - Filed Under Finance | Leave a Comment
Retirement is a big word. Some take it seriously, most do not. "Planning for retirement? Nah, I'm too young for that." Is that not a very common sentiment among the general working population? In actual fact, retiring (and of course, not being able to retire) is and will be one of the most important milestone through our lives, and should not be placed at any priority, other than top.
Retirement is a process and a long one at that. And how do we mere mortals go about doing this 'process'? With proper planning and most importantly, discipline, retiring is not a concept but a reality. Most of us working adults want to retire. We want to sip coconut rum while relaxing on a yacht moored off the Caribbean Sea. We want to travel and see the world. To put it simply, we just want to do what we want, and not have to worry about the next pay check. After all, we were supposed to have worked enough already.
To see how much we need for retirement, let us work backwards. How old do you see yourself retiring? Fifty-five? Seventy? Set a goal for yourself. Make it realistic but exciting. Assume you wish to retire at fifty-five, which is a reasonable age, when the kids had graduated from college, the house is fully paid for, and damn you have already worked for thirty-five years. The next question is, how long do you expect to live? With advancing healthcare and medical science, living to eighty is not uncommon.
Next, let us select a very conservative seventy-five years old as our average life expectancy. That spells a good twenty years of retirement. The next question, and the most important one is, how well do you want to retire? To be conservative, we shall endeavour to have a modest retirement, spending $3,000 a month on doing things that you can only afford to have time to do during retirement. That adds up to $36,000 a year and spread across twenty years, you need to have at least $720,000 lump sum at the point of retirement. This sum of money does not take into account inflation over your income earning years.
Now here comes the reality check: how many years do you have to accumulate this sum of money? For a fresh college graduate at say, twenty five years of age, he has a grand total of thirty years to achieve this three quarters of a million. To aspire to live on $3,000 a month upon retiring at age fifty-five, and dying at age seventy-five, the amount he has to accumulate, works out to averagely $24,000 a year, across thirty years. I am not including rate of returns on his funds for simplicity. Now, how many years have you got to save for your retirement? How much do you need to save? This is perhaps why there is a term called 'middle-age crisis'. A forty year-old suddenly realises that he has not accumulated enough savings, and his desired retirement age is near. And using the very simple method I described, he realises that he needs to save at least $50,000 or even $60,000 a year. And being so near his retirement age, he cannot risk investing his money in financial products with high-yielding returns since they are of higher risk. So the poor man has to bite the bullet, tighten his belt and cut down on his expenditure, or even (dare I suggest it), work past his desired retirement age. What can we do to make sure we do not become victims of this predicament?
Start young. Give yourself no chance to extend your retirement age past your desired age. In the example of the young working adult I outlined just now, if he starts to plan for retirement at an earlier age, he would have a much higher chance of achieving his retirement goal. As you might have already noticed, he would have a much easier time as well.
Save smart. Wealth accumulation for retirement does not have to come from cold hard cash. Permanent life insurance is one way you could protect your family from the loss of an earning power in the event of your death, as well as providing you a good retirement fund when you surrender the policy or make withdrawals from it. Permanent life insurance pays an interest when the plan is in force. The interest rates vary among insurance companies, as well as according to the general economy, but will generally still be higher than what most banks can offer you for a basic 'stash-away' savings account. For young working adults, their time horizon is relatively long, so managed funds and medium risk investments can also be a way to help to build up a significant retirement nest egg.
Stick to it. As I mentioned, retirement is a process. And when you achieve it, retirement would be really sweet. You would be able to live your golden years as you want to. So do not allow yourself to deviate from your retirement plans. Allocate a comfortable amount to put away for your retirement plans, and do not deny yourself the privilege to enjoy life once in a while. Find yourself a good financial adviser who can recommend good financial products and review your plans at various points in your life.
Retirement is definitely not only for the affluent. As long as you strategize and devise a clear and concise plan, retiring is definitely not a dream. People of all income levels would be able to do what they want, when they want, when they finally retire and get to enjoy their well-deserved golden years.
Lionel Mar is a qualified financial adviser with one of the major insurance companies in Singapore. He has a degree in computer engineering, but finds more meaning in life educating people about managing their finances than helping users troubleshoot computer problems. Planning to practise what he preach, he is committed to helping people of all income levels to achieve their financial dreams.
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