It has never been easy to save sufficient funds for a comfortable retirement. Many times, we are cumbered with a load of expenses from car payments to mortgage installments. Due to the many financial pressures, we find it challenging to devise a suitable retirement plan. But a few basic concepts can simplify our journey to the golden age.
Knowing our current time horizon and expected age of retirement is the basis of an effective retirement plan. It is good to have returns that can transcend beyond inflation. This allows our retirement benefits to maintain our purchasing power during the advancing years. The problem with continuous inflation is that it erodes our liquid finance as time goes by. Saving some bucks in the early 20s could mean a lot in decades to come considering the power of compounding interest.
A general rule of thumb is: we should save more for income and capital preservation when nearing retirement. Allocating funds to bonds may not give significant returns as we approach the senior years. At the age of say 63, we wouldn’t be worried so much about inflation but rather our needs at retirement. However, a young person who just got employed would be worried about an increase in the cost of living in 40 years’ time.
As we save for senior years, we have to break down the plan into various components. For instance, we can divide the savings into 3 periods: paying school fees for our kids, money for our retirement home, and living expenses. A plan involving multiple stages should incorporate different time horizons, not forgetting the liquidity requirements. The idea is to create an optimal allocation strategy. Now, this might seem a little confusing. But, by researching the best financial advisors, such as simply googling ‘financial advisor knoxville TN‘ or something similar, you can find the right fit for you and your financial needs. We must adjust our portfolio as the economy changes.
We know that we should be saving as much as possible but it’s not always the case. Financial planners recommend that we save 10 -15 percent of our income beginning in our early twenties. But it pays to be more specific by calculating the savings target beforehand. With a set target, we can roughly tell how much we must set aside every month to meet our retirement goals.
There are many online calculators for calibrating the savings target. And every year we should update the calculations to check our progress. How much we spend during old age matters more than what we used to earn. We need to understand that the future expenses are inestimable given that insurance and housing expenses are in a constant shift. Generally, we need to save 20 times our expected annual to cover the annual shortfall between the salary and expenses. In this rule of thumb, we assume that social security payments and pensions have been subtracted.
To be on the safe side, we need to establish a comfortable risk zone in our retirement portfolio. Knowing what is necessary and what is extravagant is crucial. Let us normalize discussing this matter with our family members and not just the financial advisors. We don’t have to add risky investments trying to make up for the time lost. The potential returns may be higher and so are the chances of loss.
The bigger the span between now and old age, the greater the risk our portfolio can cope with. Young people below 30 years can invest in riskier areas like stocks. Volatility is inevitable but stocks have been shown to outdo other forms of financial securities like bonds in the long haul. And by long haul, we mean over a decade. A young and energetic person can tackle greater losses because there is more time to recover. But people in their 50s cannot. When investing in bonds, we can use these criteria to align the risk with our age:
- Conservative risk: A percentage of bond funds equal to the current age. The rest goes into stock funds
- Moderate risk: Stock funds equivalent to 110% minus the current age. The remaining goes into bonds
- Acceptable risk: Stock funds equivalent to 120% minus the current age. The rest goes into bonds
The risk level represents our ultimate goals. It is also good to set aside a percentage of income in risk-free treasury bonds. The financial markets tend to go through long periods of boom and downfall. So the value of the retirement portfolio rises and falls in the same measure. A decline period is an ideal time to buy, not sell.
It is never too early to start saving for retirement. Our financial shape would be much better if we were to start saving as soon as we have a source of income. Apart from secluding some cash for our golden years, starting early gives us the benefits of compounding interest. Being financially prepared can provide us the assurance of a healthy retirement life. So, won’t it be a good idea to manage our wealth with the assistance of financial advisors? If we start early, and contact financial planners like Financial Advisor Cardiff, we can start planning for the future. It might even be possible that we end up being in a good financial shape by the time we reach our retirement age.