Whether you envisage an active retirement travelling the world, or simply want to have enough money to cover basic needs, retirement planning is something you need to attend to.
We all know it is something that should be done, but the prospect of looking at different pension plans can be daunting. Besides, some people may think, “I’m young, I don’t need to worry about retirement just yet.” That could be a big mistake as the earlier you start saving, the better off you will be when you retire. It used to be the case in most countries that you studied until 21 or 22, worked for around 40 years, then retired in your early to mid-sixties. That pattern is changing, as governments struggle to meet the growing costs of an ageing population, often combined with low or even negative birth rate. The obvious solution is to raise the retirement age but that doesn’t necessarily mean the length of your retirement will be shorter. With increasing lifespan, many gerontologists believe we will be living much longer – even to 100 years and beyond. That means you will need considerable resources to cover that need. Where do you start?
The first action is a mindset switch into accepting that today is where planning begins, even if you have only recently started work. You could rely on the state pension, but as well as the date being pushed back there is a fair chance that it will be less generous in the future.
Therefore, as well as a work-based pension, you will need to put aside some of your own cash for the future.
Think of your finances like a boat – it can take you places, but if it’s leaky, you spend all your energy bailing out and not getting anywhere. Making a provision for retirement will involve saving some of your hard-earned cash, but it doesn’t make sense to have overdrafts and credit card debts with high interest at the same time as savings producing modest returns.
So, one of the best ways to safeguard your financial future is to clear your debts and keep it that way. A mortgage is the exception, although funds permitting, you could also consider early settlement, although you will need to ensure there are no penalties for doing so.
Another way your financial boat can leak is by paying the taxman money you don’t have to. Most countries now, in their desire to encourage a third pillar of pension provision (after state and employer), enable banks to provide tax-free pension funds into which you can pay regular sums, or top them up when you are flush. It is a good idea to increase your personal pension fund contributions in line with your income – so a rise means more money for the pension account. Be mindful that usually, withdrawal of money from a dedicated pension fund will mean that you lose that tax exemption, which then becomes due. The key is to get into the saving habit.
Some people may want to fast-track their savings by getting higher returns through investment funds. This can give them stocks and shares in companies, or a portfolio of stocks. It is generally advised that most people should only invest a small proportion of disposable income in high-return, high-risk assets, and for pension purposes, an index-linked, conservative investment strategy fund or government bonds might be a safer bet.
This brings into play your investment horizon, namely the distance between when you start saving or investing and the point at which you plan to cash out. An indirect way of influencing your future wealth is to invest directly in yourself. That means gaining new qualifications and skills, so that you become more attractive in the job market, get a better job with more money, better pension and more to save. You are, potentially at least, your greatest asset. Investment in that asset also means staying healthy if you want to enjoy a long and active retirement.
Quite a few couples choose to downsize, selling off a large property once the children have flown the nest for something more modest and manageable.
In so doing, they release static equity that they move to a fund, or draw upon to bulk up their income, or pay for that holiday of a lifetime.
However you plan to spend your retirement, like your future health, it will be largely determined by what you do now and what good habits you develop.
Tekst pochodzi ze specjalnego wydania Business English Magazine Finance nr 12/2020.