Retirement plan is one of the most important parts of individual’s financial planning. The fundamental goal of retirement plan is to achieve the financial independence in your retirement years to fulfill your dreams such as opening a restaurant, building a house at native, music class, foreign travel etc. Secondly, you should be able to maintain your current lifestyle even during your retirement years. To build a retirement fund of your choice the first step would be calculating your retirement needs. Calculation helps in estimating how much corpus we need at the time of retirement to sustain our current lifestyle. It should also determine how we will build the retirement corpus.
The article discusses three critical factors in determining how much we need to save to build our retirement corpus. It will help you develop a structured process for retirement planning as it involves lot of calculations, revisits of the plan from time to time to see if your retirement plan is on track and aligned with meeting your retirement goals or not.
Time Horizon to retirement
Starting early has great benefits. The earlier you start the better are the chances for building your wealth as you get more time to earn higher returns on your investments. You get the time to compound your wealth and build a desired target in the end. However, most people do not follow this and start investing when they are married or have kids without realizing that they are already late.
This is another important factor of your retirement fund process. Risk and returns are directly co-related. More risks will give you high returns. Your fund allocations will be depending on your risk tolerance level and this will ultimately determine your investment returns. Equities as an asset class give much higher returns compared to other asset classes but they are risky shorts. Also your risk tolerance also depends upon your time horizon. Longer the time period more risks you can opt for to gain good returns.
Current Financial Assets
Getting an estimate of your current financial assets helps your retirement planning effort become simpler. From a finance perspective, assets would be items that generate current or future cash flows. When you can get the exact estimate of your financial assets, you should project their value at retirement. You can then utilize the money for building retirement fund through asset allocations of your choice in the markets.
Retirement fund cannot be optional but a necessity in today’s time. Especially, when more and more people are shifting to nuclear family patterns in India. Secondly, gone are the days when people used to sit at home and chant name of god after retirement. They are eager to start the second innings of their lives with full energy and enthusiasm. Thus, it becomes one of the most important aspects of financial planning. The earlier you start saving for retirement, the easier the task becomes and higher would be the returns due to the compounding element. It is advisable to give a careful consideration to retirement planning as it is an important phase of life. By planning for it, you can make retirement, the golden years of your lives.
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