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Retirement Planning

Retirement planning involves calculating what level of income is likely to be required at a specific date in the future and the sum of money that will be necessary in order to provide this income. It is advised that 2/3 of present income should be considered as a reasonable level of income during retirement years.

There are two ways in which to calculate the amount of money that you require. Plan for 25-30 years of retirement, the flaw in this calculation is no one can say how long they will live. The most common way is to take the assumption that you will purchase an annuity (annual income).

If you are planning for the annuity route then this is building a large enough sum of money in the future that you can generate an income via investments.

Nearly half the working population is not saving enough for retirement, and one fifth is failing to save anything at all, according to a major study on pensions!" Now you may not have to rely solely on your own personal retirement plan but the above figures highlight the importance of a) starting a plan and b) starting the right plan for you.

Stages of retirement planning

Below are some guidelines for successful retirement planning at different stages of your life.

Young Adulthood (21-35)

Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical and valuable piece of retirement saving. This is because of the principle of compound interest. Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. Even if you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing at age 45, thanks to the joys of compounding. You might be able to invest more money in the future, but you’ll never be able to make up for lost time.

Early Midlife (36-50)

Early midlife tends to bring a number of financial strains, including mortgages, student loans, insurance premiums and credit card debt. However, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings. Dont neglect life insurance and disability insurance. You want to ensure your family could survive financially without pulling from retirement savings should something happen to you.

Later Midlife (50-65)

As you age, your investment should become more conservative. While time is running out to save for people at this stage of retirement planning, there are a few advantages. Higher wages and potentially having some of the aforementioned expenses (mortgages, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest. For those who have maxed out tax-incentivized retirement-savings options, consider other forms of investment to supplement your retirement savings. Blue-chip stocks or certain real estate investments may be reasonably safe ways to add to your nest egg.

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Retirement Goals

Remember that retirement planning starts long before you retire -- the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save.Some people say that you need around $1 million to retire comfortably. Other professionals use the 80% rule, i.e., you need enough to live on 80% of your income at retirement.

If you made $100,000 per year, you would need savings that could produce $80,000 per year for roughly 20 years, or $1.6 million. Others say most retirees aren't anywhere near saving enough to meet those benchmarks and should adjust their lifestyle to live on what they have. Whatever method you, and possibly a financial planner, use to calculate your retirement savings needs, start as early as you can.



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