Planning for Retirement

According to a Confidence Survey by the American Savings Education Council in Washington, D.C., only 21% of Americans are very confident of having enough money to live comfortably after they retire which means they may have a retirement planning guide. The study also found that three in 10 workers have not saved for retirement which means they did not bother to have a retirement plan. Retirement is probably the last thing on your mind when you start work and earn an income for the first time. It is something that is about 40 years away. But those 40 years translate into a mere 480 paydays. From those 480 pay checks, you have to save enough money to live on from the day you stop working until the day you die.

If you live the high life when you are young, without saving or having a retirement plan you cannot expect to retire wealthy. Maybe, the only thing that could you save you now is winning the lottery. But, even if you don't win the lottery, don't give up your dreams -- you can still make sure you have a retirement plan. But wait too long and you won't need a retirement plan!

One of the big questions about a retirement plan is how much would I need? For most people, the savings in a retirement plan amount to their single biggest investment. Far more money than the total of their assets. The savings in terms of your retirement plan, however, may not be enough, even if you start with your saving early according to your retirement plan. Then, do not draw down on those savings along the way! Most employer-sponsored retirement funds are based on you receiving a pension of about 70 percent of your final annual salary (excluding motor vehicle allowances and other income). This means you have to top up your retirement plan with additional savings.

Assessing how much money you need according to your retirement plan is difficult, especially when you are young. The simplistic answer to the question how much you need for your retirement plan, and how much capital you need the day you stop working to ensure a financially secure retirement is: As much as possible!

In assessing how much money you need for a retirement plan, you need to ask yourself two questions:

1. "What lifestyle do I want when I retire?" This ranges from how you intend to live and where you intend to live. Once you have decided on the lifestyle you want and how much it will cost, you need to work backwards to establish how much you need to save and how long it will take to save the required amount of capital.

2. "When?" You need to set a retirement date. Although you may opt for your normal pension date, you must also make it out for yourself. You work your entire life so you need time to spend your pension. Affordability, based on the lifestyle you want at retirement, is the most important factor in deciding when to retire. The choice of when you retire, however, may not always be yours. If you are a member of an employer-sponsored retirement fund, the date will probably be set for you. Disability or forced early retirement could also upset your retirement plan. But, set a date for yourself and from there you plan around that date which could always be advanced.

The two big problems you face in a retirement plan are the "retirement gap" and inflation:

1. Retirement gap: The retirement gap is the difference between what you have saved by your retirement date and the amount you need to retire financially secure. Most people only wake up to the retirement gap when they are a few years from retirement and start calculating how much they need at that stage. In most cases it is too late.

2. Value of your pension: Your second enemy is inflation, both in the build-up stages, but more particularly in retirement. While it is clear that you need to start saving early, you also need to be sure you are accumulating your retirement wealth at a rate that is greater than inflation. In simple terms, this means that the one dollar spend today will not be worth one dollar ten years from now. The effect of inflation not only determines how much you need to save, but also the investment strategies you need to follow, both while building up your retirement savings and during retirement. Obviously, however, you will also be increasing your contributions in line with inflation, but these calculations underscore the importance of beating inflation with the returns on your money as well.

The bottom line after all said and done is to have a retirement plan to ensure not only early retirement but an early retirement without any financial difficulties. The best way to calculate how much you need for retirement, how much you should be saving for retirement, and how soon or late you can retire, is to have a properly qualified financial adviser Analise your overall financial position. The process is called a financial needs analysis.

A financial needs analysis does a number of things for you:

It identifies how much money you need for retirement;

It identifies the needs of your Dependants if you are no longer able to provide for them;

It identifies how you should structure your medium- to long-term financial plans;

It clarifies your lifestyle goals; It tells you what you can afford and what you cannot; and

It often gives you a wake-up call. It is a reality check.

Once you have done your analysis, you must now draw up your retirement plan. In the build-up stages establish how much you need and regular check to ensure you are still on track. Also make sure, as this is actually the main purpose of your plan, that you won't outlive your savings.

Finally, your retirement savings strategy must form part of your overall financial plan and not be implemented in isolation. You must establish all your financial goals. You have to decide on all the important things in life that will cost you money, such as educating children, buying a home and, importantly, how you want to live once you retire. You need to balance all your needs if you are to get your retirement plan right.

Remember, your personal circumstances are a major issue to consider when planning for retirement and a financial needs analysis is not a once-off event. You must constantly revisit your financial and retirement strategies to ensure you are on track.