A great retirement plan should “begin with the end in mind” – Steve Covey.
A great plan begins with the end in view, that is – set the goal and then create the plan that gets you there. It is very simple and straightforward, yet and still very uncommon. Most of us will save x amount per unit of time and then determine if and when they can retire. Meaning that if upon retirement the amount is not enough, they will continue working until it is.
So, how quickly do you want to retire? Are you comfortable leaving things to chance?
The following is a simple steps process you would need to figure out when developing a retirement plan.
#1 Determine the Vision for Your Retirement Plan
You will need to have at least a rough idea of what your dream life after retirement looks like in order to complete the retirement plan. This way, you can easily approximate your retirement costs and come up with a budget more easily.
Many common retirement plans include: traveling the world, staying at home, moving back to the country or even reading novels.
#2 Determine Your Retirement Date
Once you have figured out the vision for your retirement, you will need to pick the date upon which you intend to retire. The reason for this is to calculate and the number of years you have to build your retirement plan to meet your goals, and because your pensions and savings depend highly on this date.
#3 Determine Your Cost of Retirement
The costs you will incur every year after retirement is the cost of your retirement. In order to adequately create a great financial plan, you need to guesstimate how much you will need a year when you retire. Since you are not consulting a professional retirement planning expert, we can round off figures and generously estimate the amounts. This way we can adequately take care of inflation uncertainty and return on investment factors. My rule of thumb of making great estimates is to use your current expenses and spending as a starting point.
#4 Determine the Amount You Need to Save
So, how much do you need to save? Taking the amount you will require every year after retirement, now you can easily approximate how much you need to save now. To do this, you will need to match your projected income to your estimated expenses by using the following steps:
- Sum up all the pensions and savings income you are to expect upon retirement. If you are unaware of how much you are expected to receive every month, contact your service provider.
- Subtract this amount from your total estimated expenses per year/month depending on how often the income will come in. The difference between your expected income and your expected estimated expenses will yield either a shortfall or excess surplus per year/month.
- If you have a shortfall, you will need to make up for it by estimating the amount to support that shortfall. This is the amount you need to save to meet your retirement plan obligations.
To do this, you will need to take the total estimated expenses amount per year, multiply by the number of years after retirement. This will give you the total shortfall you need to make up for.
That is if your shortfall is KES. 25,000 per month x 12 (annualized) x 30 (years after retirement) = KES. 9,000,000
#5 Build A Savings Plan to Meet Your Retirement Goal
With this amount, you can now build a savings plan.
Take the amount in the previous step and divide it by the number of years you have until retirement. i.e. KES. 9,000,000 / 20 (years to retirement) = KES 450,000 per year. This translates to KES 37,500 per month. This will give you the amount you need to save per year.
With this figure, you can set up your account to automatically save this amount every month to meet this goal.
However, if this amount is too daunting, you can revisit your retirement dream or reduce your expenses every month. Whatever rocks your boat!
#6 Determine Where to Invest Your Savings
This probably the most difficult step to determine on your own without sufficient information on the market. Investing for the long-term is a very difficult task even for investment professionals given the investors’ expectations. However, not to complicate things here – you can consider shopping around and talking to various investment advisors. Share your plan with them and they will give you the various investment options matched to your needs.
However, some common types investment options you may have:
- Mutual funds with long-range outlook.
- Efficient portfolios of stocks, bonds, and money market investments.
- Real estate with positive cash flows from rental income.
Related: 3 Paths Of Wealth Accumulation
#7 Maximize Your Saving Using Tax Exemptions
Saving for long periods of time to meet shortfalls in your retirement plan can be boosted by tax deferral investment options. These investment options are either government-sponsored retirement plans or tax exemptions within some investment vehicles such as life insurance products or housing bonds.
Related: How to Legally Pay Less Taxes
Finally, it is imperative that you start planning and saving for retirement now. The sooner you start the better life you might have upon retirement with more than enough to sustain you. Do not put off this decision and fail to meet your retirement plan. Delaying this may leave you highly dependent on others upon retirement.
Happy Investing!
You can right-click on the following links to read more on financial planning:
- How Time Can Turn KES 20,000 into KES 10M
- How to Make Millions in Stocks
- No Shortcuts. No Cheat Sheet. Expectancy Investing!
- 10 Laws of Building Wealth Leverage: The Key to Amassing Wealth
- 3 Steps to Build Wealth
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.