This article covers the importance of early retirement planning.
What are retirement goals?
Setting “retirement goals” is about determining the income you need for retirement, and the capital needed to achieve it. It is a complex process that requires several immediate decisions, such as:
When you want to retire,
Where you want to live (current home, new home, and desired location), and
What you want to do (live quietly, travel, fund grandchildren’s education).
Understanding the Need
Once you know what you want for your retirement, the next step is determining how much money you need.
Retirement is a radical financial transition. You will have no income from employment. You must pay for everything from accumulated funds or alternative sources of income (e.g. rental property).
With longer life expectancy and uncertainty about government policy (e.g.: income tax, anti-inflation measures, etc.), you must build in safety margins to ensure that you do not outlive your portfolio.
Factors to Consider for Retirement Planning
Your retirement plan depends greatly on your life stage. Planning early for retirement gives you more time to achieve your goals.
For a young person (20s, 30s)
- Time horizon: With up to 40 years until retirement, you do not need precise goals, just general targets. You have ample time to achieve your goals even if they change over time.
Risk Tolerance: You can afford to take high investment risk as you have ample time to recover from market shocks.
Starting amount: A small, modest starting amount is enough. You may need capital to buy a home, or pay for weddings. But you have ample time to save the required capital for retirement.
For someone approaching retirement age (late 50s, early 60s)
Time horizon: With just five to 10 years until retirement, your spending needs in retirement are clearer and more predictable.
Risk Tolerance: As your capital is the main source of income during retirement, there is less scope to take risks.
Starting amount: You will need a substantial amount, but you would have already paid for the largest expenditures (e.g. home, children’s education), so you can accumulate substantial savings.
The starkly different starting positions above mean that retirement planning must be tailored to individual circumstances.
How to Invest for Retirement
Saving. Putting money aside monthly is the most of important part of retirement planning. The next step is to invest it to meet your financial goals.
In this low-interest-rate environment, you must invest smartly. Earning just a few percentage points more annually makes a big difference over time.
Suppose your goal is to have $1 million when you retire. If you invest in a savings account that earns 3% annually, you must save around $1,200 monthly for 38 years to meet your goal.
But if you invest in a portfolio that earns 8% annually, you can achieve your goal 16 years earlier. Alternatively, you need to save just $360 monthly over the same 38-year period, and spend $860 more as you please.
Plan for your Retirement with The Family Office
The Family Office can help you design a plan that is exclusively yours, and prepare you for a worry-free retirement.
Don’t plan your lifelong journey alone. Contact us for consultation.