By Carol Yip
There are always advantage to planning ahead especially in your retirement plan. Be mindful that during the time period when you are accumulating your money for retirement, you will face certain leakages, which mean having to use some of your retirement money unexpectedly or earlier than planned.
The “leakages” are things, people, situations, circumstances, events, mistakes or actions that will cause you to spend the money which you have set aside for your retirement.
Some of these “leakages” are unpredictable and uncontrollable but some are within your control. A few typical leakage examples would include: personal spending habits and family financial commitments, parents’ living expenses and old age care, losing your job, sudden demotion or retrenchment, business failure, unexpected ill-health with high medical expenses etc.
Although there are factors which is unpredictable, but you still can plan and calculate your retirement fund earlier. You are required to make assumptions like the age you expect to live up to, the type of assets and the expected investment return you will have within your retirement fund, your expected personal inflation rate, how much money you would need to spend when you retire.
There are few steps to calculate your retirement fund, first you need to determine when you plan to retire and your life expectancy. Then you have to determine your desired retirement income and calculate your inflation-adjusted annual retirement money at retirement age.
Next, calculate the funds you need to have as your retirement fund so that you can spend it during your retirement (until you die). Estimate the value of your assets to be set aside for your retirement and calculate the surplus or shortage of funds at your retirement age.
Lastly, calculate the savings that you need now if you have shortage of funds for your retirement.
During the calculation, you need to consider the following situation because in reality, you may experience inability to consistently save the amount of money that is required. Could it be due to your lack of discipline or not having that amount of money to save?
The changes in the interest rate for your investment over the years. Could it be due to economic changes in the financial world that are beyond your control?
The unexpected and unpredictable events that cause you to use some of the money that you have been saving. You may not be able to control such events as it is beyond you!
Difficulty in finding the right type of savings and investments that can give you a consistent interest rate. Could it be due to your lack of financial knowledge or that you do not know how to find suitable savings and investment opportunities?
Changes in your lifestyle that may change your personal inflation rate. Could it be that you have different preferences in your spending habits as you grow older or that your spending behaviour has changed due to circumstances in your life such as getting married, your health condition, your career or business, migrating to a different country or starting a family with children?
Remember that you need to constantly review your retirement plan and revise your retirement fund whenever there is a change in your lifestyle, your financial situation or your retirement dream.
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