Retirement takes planning. You must never forget that. If you are not consciously saving for it, you could find yourself in a very hot soup later.
It is human nature to care more about immediate issues than something that feels far away, like retirement. By the time people get around to caring about retirement, they have already wasted precious time.
Tina Di Vito shares some excellent points in 52 ways to wreck your retirement, and how to rescue it. I have borrowed heavily from there and presented four below.
- Not being clear on what you mean by retirement.
How retirement is perceived is undergoing a fundamental change.
Earlier, it was the case of being shoved off the demographic cliff and being forced to leave the company, saying goodbye to the 9-to-5 lifestyle.
Today, the concept of retirement is being reconfigured, and it could be a phased retirement.
It could mean just slowing down and working 3 days a week, or, working 5 days a week but just for a few hours each day. It could be opting for just project-based work or going off the salaried payroll to that of a consultant. It could also be the conventional “giving up work” altogether to pursue your hobbies or volunteering. You get the gist.
Neither does it have to be at a particular age. You could be retiring way before the conventionally set mark, out of choice. Or maybe, a golden handshake was offered, and you were asked to move on.
There is no right or wrong. It all depends on what you want from life, and what option is best suited to you, taking into account your financial position and the number of dependents. But how you choose to interpret retirement is what will form the basis of your retirement plan.
- Not having a plan.
If retirement only lasted a few years, you could get away with no plan. But what if it lasts 30 years? Well, then you cannot leave it to chance. Which means you need clarity to embark on a strategy.
Any financial adviser will tell you that there is a direct link between having a financial plan and saving more. Even surveys reveal that individuals who had a financial plan in place ended up saving more.
Having a financial plan and just saving something, however small to start with, can make a big difference to retirement income in the long run.
- Not realizing that your decisions right now are affecting your retirement.
Retirement planning is not something you do at a specific point in time or at a specific age.
We spend one-third of our lives growing up and getting smart, one-third of our lives working and buying things, and one-third of our lives living off the money and other assets we’ve accumulated during our working years. In essence, everything we do in the first two-thirds of our lives will affect the last one-third.
We affect our retirement plans every day with decisions we make or don’t make. This is all the more relevant in the second third of our lives.
For instance, food is a basic need, but going out every second day for dinner is a discretionary choice. Vacation could be a necessity, but it is your call whether to view a cruise liner as discretionary or luxury. Buying a car could be a necessity, but does it have to be a Jaguar?
Know where your money is going. Make adjustments to your spending habits. How you are spending today will give you a sense of how you might be spending your money in the future. Getting into the habit of tracking how you spend your money is a good money management skill to have both now and during retirement.
- Not keeping a tab your spending, savings and investments.
Sarah Newcomb, Morningstar’s director of behavioural finance, suggests that you ask yourself 3 three questions:
- How much are you paying your past? (Servicing debt)
- How much are you paying your current self? (Lifestyle)
- How much are you paying your future self? (Saving & Investing)
Put percentages to these and you will get a snapshot of where you currently stand.
You need to watch your spending, to ensure you save adequately. But saving measures aren't enough to secure a sustainable retirement. You need to invest smartly, to build those savings into a retirement kitty.
Take into factor the risks of longevity and inflation. Which means that a retirement portfolio must have exposure to equity. The actual exposure will depend where you are currently on your retirement schedule.
Have a retirement goal. If you don't have a goal, you will never reach it.
Have a retirement plan. If you don't have a plan, you will not know what path to follow.