FINANCIAL PLANNING FOR RETIREMENT

Imagine going to a picture gallery where all the pictures are blurry. Would you not be more interested if the pictures were High Definition with clear silhouettes. This is exactly how Retirement Planning looks to most people-a walk through a gallery of blurred pictures!. The uncertainties about the distant future and reliance on too many assumptions make the retirement planning vague and therefore people lose interest in planning for it actively and so they go with whatever default, low effort retirement plan options they are offered.

Planning for post-retirement income is important because most of us no longer live in the era of defined benefit pensions. We’ll live by what we have saved, therefore it is important to know where we’re on our journey of financial freedom.

You can find financial calculators on the internet that will pop a number to you that you have little understanding of, and therefore will help little in shaking the inertia because people are still clueless where those numbers are coming from.

Unless you know the process you don’t own the process, because knowing is owning!

My goal is to illuminate the retirement planning process through a series of blog posts that can help people understand each aspect of it so that they can actively plan for a financially secure life ahead. A lazy, default approach to retirement planning can be risky if we outlive our savings. The biggest risk of our times is the longevity risk-what if we live longer than the horizon we have planned for? It is therefore important to know the financial path that we will be walking on.

If Retirement Planning is a coin, Planning and Investment are its two sides.

Planning can be summed up as how much money you want in your retirement account at the time you retire and Investment will tell how to invest that money to reach the goal.

Let's begin with Planning.

There are 4 easy steps that you need to know to find out how much money you need in your retirement (RRSP/IRA) account to live your desired lifestyle:

Step 1: Calculate your post-retirement expenses i.e. how much money you will spend after you retire.

Step 2: Deduct any old age/social security benefit that you may receive from the government.

Step 3: Account for inflation and tax i.e. Calculate inflation-adjusted pretax income that you need

Step 4: Assume how many years you will live and a Real Rate of Interest, to calculate the amount of money you need in your retirement fund.

At each step, if we know what we’re doing and why we’re doing, it becomes a lot easier to follow the whole process. My next blog posts will explain these steps in detail so that we can define our targets and then get to chase them.

So let’s get started and Happy Planning!