​How to prepare for retirement

How To Prepare For Retirement

Retirement – the grey area after a long career. (And not just the hair) To some people it  marks the beginning of a period of uncertainty, but to others, it's a time filled with possibility and imagination. With the economy being where it is today, many are working longer hours and retiring later in life. We wanted to take this time to further educate you on what you need to do to be prepared for retirement.

When to start thinking about retirement?

The thumb-rule says the best time to start thinking about and start planning for retirement is when one is least pressured about it – at the start of their work-life. From that early stage, whatever money (big or small amount) could be put away for retirement, would drastically increase many folds through compounding based on the time-value of money over the years. Also, to meet a planned financial goal 20 years down the line, one would need to put in the less as they start saving the earlier.

Let’s have numbers to clarify

Say, one has a financial goal of saving $100,000 some 20 years down the line. If that person starts saving today, even without considering any interest component, a total of $5000 contribution per year, for every year till that preset timeline, would hit the target. But if that person waits another 10 years to reach the $100,000 in same time line, the yearly contribution shoots up to $10,000 per year for every year then. That is obviously a way more strain on one’s earning-consumption ratio. So, literally, Time Is Money!

Now consider that to meet the same financial goal, another person starts to invest those $5000 amounts every year in a retirement fund with a fixed 4% ROI compounded annually, for the next 20 years. The result is: $154,846 at the end of those 20 years! Now, fancy the extra benefits of higher ROIs and compounding frequencies offered by different investment schemes and retirement funds – the final output only grows bigger and bigger.

So, to grab the benefits at the most fruitful level, one must start at the earliest. But it is good to consider a few more things before starting execution of the actual plan for retirement too. One must be able to answer an honest YES too all 3 of the below questions consistently before starting to save for retirement:

  1. Is there an already established Emergency Fund for tackling sudden financial emergencies?
  2. Is one able to meet all of the short-term necessities (like food, home, bills for utilities and other monthly dues) for himself or herself and the immediate dependents?
  3. Is there a steady flow of income available in surplus to cover the expenses like debt pay-offs and insurance premiums?

It might be a more prudent and practical decision to hold off saving for retirement if someone couldn’t meet any of these requirements first.

What to do to prepare yourself for retirement?

There are two separate aspects of this preparation phase – financial preparation and mental preparation.

Financial Preparation

Below are a few key concepts to be considered for financial preparation:

  • Importance of saving – starting earlier: As discussed before, the first sign of awareness about one’s retirement phase of work-life is to start saving dedicatedly for that purpose. Start saving at the earliest age and keep up the good work as the career and life itself progresses through the years towards retirement. Chalk up a budget plan for life’s immediate needs and a cushion for emergencies and then deposit the remaining amount of the earnings to a savings account. Do NOT indulge in any risky propositions concerning that stash. Money really doesn’t double overnight.
  • Be wiser – invest the savings into Retirement accounts: Think about the retirement needs (depending upon what sort of lifestyle one wants to continue in retirement) and figure out an approximate annual sum to meet those goals. Now, look into the available options for retirement funds and schemes – IRAs (Roth and/or traditional), employer sponsored/matched 401(k)s etc. and also look up the income tax saving options such as Health Savings account, Flexible Savings accounts etc. invest in these options and let the money grow within a diverse investment portfolio and compound interest effect year after year, till one retires.
  • Find out about benefits from the employer and Government: Find out the employer sponsored financial benefits like a group pension plan, annuities, dependent care saving account etc. and check the eligibility criteria. One should make sure to avail all income and savings related benefits applicable for the person in order to maximize the savings on earnings. Also, look up the Government sponsored benefits and know in detail about what applies for whom and when. Act accordingly, to maximize the utilization of such benefits.
  • Pay off the debts: keeping an active debt means handing extra money to someone else as the years drag by. Make plans and stop this drainage. Pay off the debts with higher interest rates at the earliest and then move on to the debt with the next higher interest rate. When one debt is completely paid off, do not stop separating with that amount of money anymore; instead use that component to pay off the next debt. For example, if one closed a debt of $100 EMI recently, use that $100 now to pay off the next incremental debt, instead of taking it back to the daily consumption cash flow.
  • Review insurance coverage: it is one of the most important tricks that would help people save quite more than anticipated, if played correctly. As the years go by, the insurance needs of people and their assets change a lot. Review the active coverage periodically with a trusted insurance representative or a broker to save the excess amount of money in keeping unnecessary coverage.

Mental preparation

This is perhaps the much less considered side of retirement. After a person retires from the job life, there seems to be an immediate void of activities in most cases. Also, the log-term bond of steady work-relations dissolve quickly, leaving one emotionally affected. So, it’s always better to think ahead and make a plan than to face the change abruptly. Figure out ways to spend time in retired life well before getting into that zone actually. Make plans for trips long-due, join local clubs, make new friends, maybe, establish a hobby to have some creative diversion. Staying positive in the late years of life adds to one’s strength – both mentally and physically.