One of the most important, yet often ignored, parts of financial independence, is planning your retirement. It’s often difficult to know where to start, what your options are and what you should be thinking about. But without doing so, how can you feel comfortable about your future? How are you going to know what your retirement will look like? How can you be sure you can even provide for yourself when you stop working? Part 7 of the Financial Independence in 10 bite-sized parts will walk you through the essentials of this important part of financial planning.
Part 7: Plan your Retirement
Retirement provisions vary greatly from one country to the next so with this part, more than any other, you want to make sure you check the details of how the topics described below work in the country or state you live. In most cases, people have access to one or more of the following three ways to save up for your retirement:
Social security or state pensions are generally provided by the state after a certain amount of active working years. Both employees and employers might contribute to social security payments and thereby fund the retirement payments made to those who have reached the state retirement age. Social security conditions and pay outs vary greatly between countries. Find out what the regulations are regarding this type of retirement income to get a rough idea of how much you might be entitled to by the time you retire.
A second way to save up an income during retirement is by participating in a workplace retirement fund via your employer. As an employee you can make regular contributions that in some case employers might even match, meaning they add in a certain amount of money up to a certain maximum too. As workplace retirement funds are often offered by an employer, it makes it easy and convenient to participate in. Examples of this type of retirement funding include 401(k) and (Roth) IRA accounts in the US. Contact your HR department or arrange a meeting with the person in charge of retirement funds in your company to find out what your options are and -if you have been participating- how much you currently have available in your retirement account.
If either of the above isn’t available to you or is not sufficient for what you expect your retirement needs might look like, it is often a good idea to look into a private retirement fund as well. There are often many options available with banks, insurance companies or specialised retirement fund companies. Of course this requires a little more investigation and preparation work in order to find one but also gives you more flexibility to find one that better suits the needs you expect to have. If you already have a private pension fund, check out the conditions and contributions you have made to again get an idea of how much you would roughly have available upon retirement. If you haven’t got a private fund, have a look around online for some options to get an idea of what might suit you best.
Lastly the most important part is to act upon your new knowledge and plan your retirement. Try and estimate as best as you can how much money you’ll need upon retirement, which might be a lot more than currently (for example if you plan to travel a lot more) or a lot less (for example if your mortgage will have been paid off by then). Now total the predicted amount of the various retirement funds you might be entitled to (bear in mind some – especially social security / state pensions – might go through significant changes if your retirement is still a few decade away). If you have any passive income streams that you might further be receiving upon retirement (rent, dividends, royalties) then again predict how much you would get from these. Then make a plan on how to bridge the gap between what you need and what you predict you’ll receive from the retirement funds and other income streams: open a private pension plan, increase workplace retirement fund contributions etc.
The above is an adaptation of part 7 of the 10 parts in the guidebook to Financial Independence: 100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!
Coming up next: Part 8 of the Journey to Financial Independence!