Retirement marks a significant milestone in life. The shift from your regular work schedule to a leisurely pace requires meticulous planning and preparation, and the earlier you start, the more advantageous it is.
Whether you’re a young individual merely contemplating retirement or a seasoned worker inching closer to the retirement date, there are essential measures that you need to undertake for future planning. Assess your current financial standing, envision your desired retirement lifestyle, and make the necessary financial arrangements to guarantee a comfortable post-retirement life. Here are suggestions to refine your retirement plan, regardless of age.
1. Consider Self-Managed Super Funds
Looking at Self-managed super funds (SMSFs) can be vital in shaping your retirement plan. When you establish an SMSF, the control is entirely in your hands. The burden and privilege of making investment choices for the fund fall to you, along with the responsibility of ensuring compliance with all relevant superannuation and tax laws. This significant financial commitment requires both time and skill. Recognizing that other options might be more suitable for your super savings is crucial.
An essential aspect of running an SMSF lies in its sole purpose: providing members with retirement benefits. Every decision you make as an SMSF trustee should prioritize the members’ best financial interests. Do not view SMSF pricing as a shortcut to accessing your super earlier or as a means to purchase personal luxuries like holiday homes or artwork for your residence. Such actions are illegal, and hefty penalties are enforced for these transgressions.
Before deciding whether an SMSF is the right path for you, consult a licensed financial advisor who is well-equipped to guide you. The Australian Securities and Investments Commission website provides information about selecting a financial advisor.
2. Consistently Enhance Your Contributions
If you cannot meet the full matching percentage or sum, ensure a gradual increment in your contributions annually, quarterly, or whenever your income increases due to raises or bonuses. Even if you can afford to contribute the full matching percentage or sum, continue enhancing your contributions steadily.
Your employer may have a setup allowing your contributions to automatically escalate by 1% each year until you hit a certain percentage. Investigate if your employer provides such automatic increments and learn how to enable this feature. This automated system can simplify the process of augmenting your contributions and aid you in achieving your retirement financial objectives.
Persistently grow your retirement contributions until you’ve reached the maximum you can afford or until you hit the legal maximum contribution limit. Should you be lucky enough to work for an employer offering to match your retirement contributions, taking full advantage of this benefit is recommended. For instance, if they offer a 5% match, aim to contribute that same amount.
3. Engage in Your Company’s Matching Program
If you decide to contribute only 2%, your employer will match this lower figure, but why limit yourself to 2% when you could be enjoying a 5% match? Some individuals express concerns about the affordability of participating in contribution-matching programs. However, the truth is, failing to participate is what you truly can’t afford. Consider this: when else does your employer offer to reward your self-investment and future planning with additional funds?
Once you’ve achieved vested status (you’ve been with the company long enough to retain all of your employer’s contributions without penalties) that money becomes yours. If you decide to leave the company, both your contributions and your employer’s matches come with you. This scenario offers benefits on both sides (especially for you).
4. Develop a Systematic Saving Plan
After establishing your retirement goals, it’s time to regularly set aside money. While using that money for indulgences like a new bag or a vacation may be tempting, it’s crucial to fully commit to your savings plan.
To help develop the habit of saving for retirement, consider arranging a direct debit to transfer a dedicated portion of your savings into a designated retirement account or retirement savings product. Starting small is okay; you can always increase the amount later when it becomes feasible. The key is to initiate a regular savings plan as early as possible.
5. Longevity and Inflation
Accumulating substantial savings is integral to retirement planning, but it’s equally important to account for inflation. If the return on your savings falls below the inflation rate, the opportunity cost of saving might increase.
From 1982 to 2019, the average annual inflation rate in Hong Kong was 4.3%, higher than the interest yielded by most regular savings accounts. Explore investment options that could yield higher returns depending on your retirement goals.
Additionally, longevity risk is an important consideration. With rapid advancements in medical technology and rising global living standards, human life expectancy has grown. Longevity risk is the potential scenario where your financial reserves or savings may not suffice for an extended lifespan, risking premature depletion.
Interestingly, in 2018, Hong Kong topped the list for life expectancy with an average of 85 years. This suggests an average individual will spend more years in retirement than previously, emphasizing the need for sufficient resources and funds to sustain your desired lifestyle post-retirement.
6. Establish a Goal for Retirement Age
A person who is a decade away from retirement could potentially be as young as 45, provided they have sufficient financial resources and are keen to leave the workforce. Conversely, they could be as old as 65 or 70 if their preparations are lacking. Those with higher life expectancies should base their retirement calculations on the possibility that they may need to sustain a retirement period of thirty years or more.
Retirement planning involves assessing not just your projected spending habits during retirement, but also the potential duration of your retirement. A retirement spanning 30 to 40 years presents a stark contrast to one lasting merely half as long. Even though early retirement is an aspiration for many, it’s prudent to aim for a retirement date that strikes a balance between the size of your retirement savings and the length of time those savings can adequately sustain you in retirement.
7. Grasp the Concept of Compound Interest
Starting to save for retirement as early as possible allows you to take full advantage of compound interest. This is how it functions: The interest accumulated from your savings, if left untouched in your retirement account, contributes to your total balance.
Consequently, you will earn interest on this increased amount in the future. It’s like getting interest on your previously earned interest. An online calculator can help you estimate the potential compound interest based on your financial circumstances.
Avoid premature withdrawals from your retirement account to maximize the benefits of compound interest. Early withdrawals deprive you of years of compound interest and often come with fees. If faced with unforeseen expenses, exploring alternatives before dipping into your retirement savings is advisable.
Setting your retirement plan in motion takes courage and perseverance, but with these steps as a guide, you’ll be on the right track to getting the retirement of your dreams. Whether you are looking to travel the world or stay planted near friends and family, it’ll all become possible if you start now.