Early Retirement Planning

Everyone wants to have a comfortable and enjoyable retirement, but without adequate planning it probably won't happen. People are living longer than ever, which is obviously good news, but that means retirement is becoming more expensive. Some people believe that they can count on Social Security (or EPF in Malaysia or CPF in Singapore) and don't need to plan on their own, but this is a dangerous strategy, as it will cover only a fraction of a typical retiree's expenses, and the long-term health of the Social Security system is very much in doubt. This post is sharing some tips that you need to know to make your golden years everything you want them to be.

The first step in retirement planning is estimating how much money you'll need. A popular rule-of-thumb claims that you will only need about 70% of your pre-retirement income to maintain your lifestyle in retirement. While you will probably save some money currently being spent on work-related items (such as formal clothes and commuting), other costs go up in retirement (health care, hobbies, etc). 70% may be a useful rule of thumb, but some people find 50% is plenty while others feel they need 100%. Some of the sites we link to provide more accurate estimates based on your specific circumstances.

The second step in retirement planning is figuring out where the money you're going to need will come from. Nowadays, people are living longer so retirees are spending 30 years or more in retirement. It is important to plan ahead if you want to maintain your standard of living during that time.

Visit the Social Security Administration site to get an estimate of how much you'll receive, and add to this any pension you'll be receiving from your employer, if any.

You may have found that you'll have plenty of money in retirement. Congratulations.

More likely, the amount was less than you would like, as it is for most people. But it's not too late to do something about it, and the sooner you act, the more you can improve the situation. Learn about the various retirement plans and see if any are right for you, and get started right away.

No matter how young or old you are, get started today. Due to the miracle of compounding, starting a little earlier makes a big difference. Consider the following (assuming a 10% annual return): Who do you think would have more money in 40 years, a person who contributes a fixed amount every year for the first 8 years and then does nothing for 32 years, or the person who does nothing for the first 8 years and then contributes that same amount every year for the next 32 years? Believe it or not, the first person would be ahead at the end. Get started today!

Determine your tolerance for risk to define the right mix of stocks and bonds for your portfolio. Experts mention a good starting point for people 20 years or more away from retirement to have a mix of 70% invested in stocks and 30% in bonds. Consider investing more aggressively if retirement is sufficiently far away. As mentioned before, the power of compounding can make a big difference; a slight increase in return can make a big difference in the long run. As retirement approaches, you can move gradually away from stocks and toward bonds, but you shouldn't have 100% bonds as soon as you retire, because you'll still have a lot of years ahead of you and should keep a mix of stocks and bonds.

Consider tightening your budget and relocating to an area with a lower cost of living.

Investing shouldn't stop when retirement starts. Even if you are already retired, you've probably got many years ahead of you; most people will have 15-20 years of retirement, and this number keeps increasing. Don't immediately shift all your money into fixed-income and money market investments. You should still be planning relatively long term, probably a mix of growth and income. We encourage you to check out the links above, but you should also consult a professional to discuss your unique situation.

If you don't meet your retirement goals, there are still some options. Determine the average rate of return on your investments before and after retirement. Stocks have a good track record for long-term growth, so invest a portion of your money in stocks that will grow your savings faster than inflation.

More info can be found here for Early Retirement Planning.