Planning is important in our lives to avoid undertaking life journeys without expectations. Your life can be divided into two parts with part 1 referring to life when you are either on the job or business market for a reward and part 2 is when you retire from part 1 activities and engage yourself in activities or hobbies that make you happy and healthy. Your goal for part 1 is to earn enough to pay your monthly bills including saving for retirement. Your destination for part 2 is to engage in activities that will make you happy and healthy while living on your retirement assets.
Purpose of the plan
The retirement plan is to guide you on how and when to save money and invest it during part 1 so that it is available to take care of your bills during part 2 of your life. Planning is necessary because there is a life to live and bills to pay after retirement. Planning for retirement gives you a degree of certainty as you walk your journey of life.
Needs in Retirement
The needs in retirement are not different from needs before retirement and they will include items like food, medical, insurance, transport, taxes, accommodation, extended family and leisure among others. Some costs like medical could be quite high as medical issues tend to crop up as one gets old.
Phases in retirement planning
The phases in preparing a retirement plan may include the following among others;
Phase 1 Idea of retirement;
Phase 2 Preparing and implementation of retirement plan;
Phase 3 Retirement date
Phase 4 First 100 days in retirement
The details of each of the above phases are discussed below.
Phase 1 Idea of retirement
The idea of retirement should be considered and implemented as soon as you start earning some income be it from employment or business. In my view, the climax of your life is reached when you are in retirement. This is the time when you do what you love without the pressure of working to pay monthly bills. Coming to terms that there is life to live after retirement and the fact that you cannot do without it must be positively clear in your mind. Develop your mission and goals for the retirement period and prepare a plan that will guide your mission.
Phase 2 Preparing and implementing of retirement plan
This is a phase of documenting a plan that will guide you towards and during your retirement period. The ideas you can use to base your plan on should include the following among others;
2.1 Assumptions
The assumptions that will guide you in developing your plan are summarized in the table below. I have included some numbers in the second column of the table to help me illustrate some points.
Current age | 43 |
Retirement age | 60 |
Years to retirement (60-43) | 17 |
Life expectancy | 85 |
Retirement period (85-60) | 20 |
Yearly income (net of tax) | US$60,000 |
Projected expenditure per year in retirement | 60,0000 |
Saving per year 20 % of income | US$ 12, 000 |
Total expenditure in the retirement period | 960,000 |
Planned assets at the time of retirement | US$ |
Projected return on assets | 5% |
Yearly income from other sources (net of tax) during retirement | US$ 24,000 |
Projected expenditure per year in retirement | US$ 48, 000 |
Inflation per year | 1% |
Growth in value assets | 5% |
Components of a diversified retirement income strategy
Source: https://www.fidelity.com/viewpoints/retirement/3-retirement-building-blocks
2.1 Personal SWOT analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats and it is a tool that you may wish to use to assess your stand in the four aspects of yourself. Personal SWOT analysis helps you to know early enough the strengths and opportunities you can capitalise on and weaknesses and threats to guard against.
2.3 Risk management
The risks affecting the retirement plan will mainly include poor-performing assets, longevity, change in medical care schemes, unforeseen needs of family members, inflation and market volatility among others. It is important a risk mitigation plan is developed to mitigate them.
2.4 Projected spending needs
There is a need to prepare a detailed projection of spending needs year by year for the retirement period to inform you how much you need to save and invest in order to fund the projected level of expenditure. I have assumed the total projected expenditure for twenty years to be US$ 960,000 assuming the yearly expenditure per year will average US$ 48,000 after taking inflation into account.
2.5 Savings
In my view, the saving guideline of at least 20% of the annual average income of US$ 60,000 during part 1 of your life will suffice and therefore the annual savings will average US$ 12,000 over 17 years to retirement date.
2.6 Investment
For purposes of illustration, I propose the savings be invested in assets by sector using the following guidelines;
Sector | Percentage |
Real estate | 40 |
Financial | 30 |
Government bonds | 10 |
Unit trust | 20 |
The challenge is more on how to invest the yearly savings of US12,000 at a given rate of return to generate adequate resources to fund the projected costs of needs during the retirement period. For a simple illustration, if the yearly savings of US$ 12,000 is invested in low-risk government bonds assets earning a return of 5% with a variation of plus or minus of 1% for 17 years, the fund will be valued at US$ 340,000 at the end of 17 years. You need an expert to advise you on how to safely invest your savings in order to get a value of US$ 960,000 at retirement time.
2.7 Management
You have the overall responsibility to ensure your retirement plan is properly managed. It is advisable to appoint an expert in the investment of retirement funds to advise you on technical issues that might arise. It is most important that the funds are safe and available at the time of retirement.
2.8 Monitoring
It is recommended that you get regular reports from your investment advisor on the performance of the investment portfolio in terms of both income and capital growth. It may not be necessary to value property every quarter but at least indicative values should be reviewed. The monitoring reports will help you to decide whether or not to change the mix of your portfolio in order to enhance its value.
Phase 3 Retirement day
Retirement generates a lot of emotions in your family, colleagues at work, friends and relatives. You have to be ready for the big day and you may need a small plan to guide you to the day. You need to be open about it to family members, close friends and business associates. You may need to bounce off some of your retirement ideas to some people close to you. Prepare a message which you will deliver to your colleagues at work on the last day. I can assure you it is not easy to part with colleagues you have shared both work and private life for some years. The process is made easy if you have adequately prepared for it.
Phase 4 First 100 days in retirement
The daily routine changes from the first day of retirement. No need for an early morning rush in order to beat the traffic. The situation is quite different during the first few days of retirement. You may find yourself taking breakfast alone as your spouse, children and other family members may have already gone to attend to their hectic work routines. You should relax and take it easy. You have time now to read newspapers, and magazines, research on Google, take morning walks and redesign your compound among others. My suggestion is to take a few days off and travel to places you have never been to. The idea is to relax your mind from the previous hectic daily routes to the new order. You can also visit friends and relatives you have not seen for some time. Towards the end of 100 days, you should start engaging in the new activities you have planned to do during retirement.
Conclusion
Planning helps you to move towards retirement with a high degree of certainty because you know exactly where you are going and you have resources to finance the journey.
