What does retirement means to you? What is the retirement nest egg that you would require during your golden years? Is it surprising to you that many people have avoided answering these questions and procrastinated in planning their retirement until it is too late in life?
The baby boomers generation is now coming into their retirement years. Unlike their parents, baby boomers can expect to live longer and have higher expectation of a better life in their golden years, traveling more and doing things that their parents did not dreamed of. However, with the higher expectation of a better lifestyle during their golden years and longer lifespan, the need to build sufficient funds in their nest egg to finance their retirement has amplified and is greater than before.
If you are one of those who do not intend worry about your financial situation and to burden their loved ones with medical expenses during their retirement years, then the task of planning your retirement has to be taken seriously. It would require your commitment to carry out that little homework and proper planning to attain the necessary financial needs through a long term savings and investment plan.
You may need some help in determining your required retirement nest egg for those golden years. The three steps process described below may assist you in planning your retirement and reaching your retirement fund target:
1. Determine the funds that you will need throughout your retirement years. Look at your current expenses and estimate how they may change after you retired. You may have paid off your house loans and for your children education by then but more expenses may go into your health care costs. It is probably reasonable to assume that your monthly expenses during your later years will be 80% of your present monthly expense to maintain your present lifestyle. Due to effects of inflation however, you will need to allow for the yearly inflation rate. By this first step, you will be able to determine how much you will need to put aside for your savings and investment plan.
2. Start your savings early in life. The great scientist, Albert Einstein once stated that compound interest is the eight wonder of the world. You should never underestimate the power of compounding interest. A financial planner friend once gave an example of the power of the compounding interest. Two friends, say Bill and Bobby started their investment saving 10 years apart. Bill started his contribution amounting $10,000 annually into his investment saving account at age 25 for 20 years. Hence, his total contribution was $200,000. Bobby started contribution amounting $10,000 annually into his investment saving account at age 35 for 20 years. His total contribution also amounted to $200,000. The computation based on a 9% constant annual growth rate for both Bill and Bobby investments show that at age 55, Bill has double the amount Bobby has in his account due to the reason that he started his contribution ten years earlier, demonstrating the power of compound interest.
3. Be investor savvy. The prevailing low interest rates that banks give out for savings deposits these requires us to be investment savvy to ensure that the value of our savings do not lose out to inflation. To generate the retirement fund, it is prudent to seriously learn the techniques and strategies of investment for a higher rate of return for your savings. As highlighted above on power of compounding interest, an investment of a rate of return of 12% is vastly superior to the investment with only a rate of return of 4%. Engaging an experienced financial advisor will help you on the asset allocation and time horizon to ensure that you are able to achieve your target.
Accumulating enough for your retirement nest egg may be intimidating and a tough call for many. However, if you sit down and work through the process of determining your future expenses, compute the necessary savings and working out your investment plan with unwavering commitment and by planning your retirement early, accumulating enough for your golden years is achievable.