Retirement Planning

 Retirement planning is probably the most contentious subject based on a few discussions I have had in the past. I find that people usually have extreme views about retirement planning. 

Retirement planning is like the HUGE ship in the horizon. It appears almost static in the horizon. A  small spec in the distance. It doesn't seem to move. It is as if it is stationary. And yet it is moving towards you. It's moving at high speed but you don't seem to notice it coming. And while you get busy with life, you tend to forget about it until it appears into sight. A huge, gigantic ship. Unfortunately and like most of us we are often caught on the wrong foot. Not having done enough to secure our retired life. 

Active income will stop at some point in your life. But expenses will not. And hence it is critical that one plans for retirement as early as possible. As early as your 20's, when retirement feels like that huge ship in the horizon.

In the good old days, many organizations and govt offices provided the safety net of a pension. Alas aside from private organizations, even governments have started scaling back on pension with some state governments doing away with it completely.  In order words, you are on your own!!

In the past, parents used to depend on their children to fund their retirement. In the golden years, children would usually take care of the parents; for all needs including financial needs. This too is now facing a huge change. With nuclear families in fashion and geographic mobility more common, it is turning out to be  a though situation for the older folks. 

So have you started planning for your retirement yet? Why do you need to plan?

As mentioned earlier, your active income (earned by giving away your time and working) will stop at some time in the future when you retire. Assuming you retire at the age of 60 years, you will still need to fund another 20 - 30 year ahead based on your saving. Hence it is important that you start your planning right away. Retirement planning is easy and yet very complex for the following reasons:

Living longer: We are living longer. Much longer than the previous generations. with increasing life expectancy, we now need to fund a much longer retirement period. Unlike the past, our retirement could last for 20 or even 30 years. And hence planning the funds for retirement becomes a complex affair. 

Inflation: What costs 100 today will cost a lot more in the future. Inflation eats into the value of your money each year. And hence the monthly budget that you will require when you retire will be significantly higher than you spend today. This makes the planning process complex given that one needs to make reasonable assumptions for future inflation. If one fails to make adequate provisions for inflation in the future, ones faces a serious risk of running out of funds at a late age.

Big ticket expenses: This is a common blind spot. Most retirement planning is focused on our regular living costs. Often the recurring costs such as rent, utilities, groceries are considered while missing out on the one off big ticket costs like major house repair, a serious medical condition, children's education etc. These need to be considered while planning for retirement. These are difficult to predict but you must make certain assumptions for the same.

Changing Lifestyles: This is the biggest blind spot that retirees face. As much as your planning will be based on your desired lifestyle. the lifestyle itself changes. Who would have thought that having air conditioners in the house, previously considered a luxury, is now just a regular requirement? Along with the cost of air conditioners, comes the increase cost of utilities. Add to that the regular cost of servicing and you suddenly start going wrong with the plans. Our lifestyle is changing almost every day.  Eating out at a fancy restaurant was almost an annual event. In the modern times it is a  monthly affair it not even more frequent. All these lifestyle changes have a significant on the retirement planning process.

Is it impossible to plan for retirement? Absolutely not. But it is important to make the right assumptions and consider the above points carefully while building your nest egg. There are many risks along the way. But the most important risk is not planning for the risk.

Watch the video below for some more insights into the subject.