| Retirement
planning should begin the moment you step into the workforce
and are financially independent. However, many people do not
realise that until it is too late. If you wish to enjoy the
same lifestyle in retirement as you have today, you should start
planning now. Your savings alone will not be enough as twenty
years of retirement can cost as much as S$2 million.
To
achieve a comfortable pool of retirement funds, you should
plan for retirement early due to the effects of compounding.
Compounding works by earning interest on your principal sum
and previously earned interest. Interest, when compounded
repeatedly over time, can greatly increase your retirement
fund. Apart from starting early, there are also other factors
that will influence the quality of your retirement in the
future, such as your ability to continue to work and whether
you are disciplined enough to save for retirement
Estimate your retirement needs
There
are two ways that you can go about forecasting your retirement
needs. One way to do it is to state your retirement income
objective as a percentage of your present earnings. As a general
guide, a retirement income equal to 80% of your pre-retirement
take-home pay should allow you to maintain your standard of
living. You may require less since, by retirement, you will
not have to worry about paying for your children's education.
In fact, commuting, wardrobe and other work-related costs
will probably be reduced. Your disability or life insurance
premiums will probably be diminishing or your mortgage might
already be paid off. However, your health care costs and leisure
costs may go up. Picture yourself in your retirement years
and the kind of lifestyle you desire. Based on your needs
and goals, you can then determine the reasonable percentage
of your pre-retirement income required. You will probably
have to revise and update your plan every three to five years.
The
other approach is to take a long-term view. Based on your
current level of spending, you estimate your expenditure,
say twenty or thirty years from now. This approach assumes
that your expenditure in retirement, in today's dollars, will
be less than your current expenditure. After making some adjustments
due to the change in lifestyle (e.g. you no longer have to
fund the mortgage/car loan, your children have left home,
etc), estimate your annual retirement expenditure as a percentage
of your current annual expenditure (e.g. 70%). Multiply this
with your current spending to obtain your estimated annual
retirement expenditure in dollar amounts. Note that this amount
is in today's dollars, and needs to be adjusted for inflation
over the next 20 to 30 years.
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