Neo has a lot on his plate and the economic downturn is starting to bite. If it isn’t rising fuel costs, then it’s food prices going through the roof, and even eating out with the family is something he finds himself budgeting for nowadays. It’s becoming a real struggle to get through the month and it has Neo worried about the future.
If, as a working man, he’s struggling to get by right now; how difficult is it going to be when he stops working and retires?
Be honest, how many people in their 40s and 50s, reading this, agree?
The answer lies in a retirement plan because we all know that money isn’t going to fall from the sky and retirement isn’t going to wait.
But what good is a financial plan if you don’t have money right now?
That’s the question most of us struggle with. “I don’t have any money to save, so why bother?”
Even if you don’t have a cent to spare right now, making the time to sit down with a financial planner to work out your retirement goals is a step in the right direction. In actual fact, you don’t need to have any money to start working on the plan.
Here are the three benefits of drawing up a retirement plan:
A retirement plan gives you a goal to aim for
Let’s look at a pilot as an example. Have you ever been to an airport at night and watched the planes taking off? Chances are you would have noticed the pilots sitting in the cockpit going over their checklists, while everyone else on the tarmac is scuttling around. That’s because the pilots are doing last minute checks to make certain they’ll reach their destination.
The pilot loads up his plane with just enough fuel to get to the intended destination.
Not too much fuel because having too much adds to the weight, which adds to the cost of flying. But having too little fuel is an even bigger problem wouldn’t you agree? It’s not as if he can pull over to the side of the road if he runs out.
Now imagine that the pilot is flying at night. There are no sign posts pointing the way and no streetlamps to light everything up. Sure, in the daytime, they can fly low and follow the road, but even that ends once they get to the ocean. Do they go left, right or fly straight? Having the perfect amount of fuel on board is not going to help when they’re heading in the opposite direction.
And then there’s the problem of time.
The passengers don’t want to arrive in Cape Town two days from now. The pilot has two hours or so to get this right.
We guarantee you that if the pilot didn’t have answers to these questions, you wouldn’t get on that plane.
So, what’s this got to do with retirement you might ask?
Think about it – if you don’t save enough money you’re not going to get to your happy ever after.
Unless you know how much you should be putting away, you just won’t get there. Better to know how much you need to save right at the beginning, than find out once you’ve reached retirement age.
How far off is your retirement? Are you behind when it comes to saving for retirement? Can you afford to save more than what you’re currently saving?
Finally, there’s the problem of time.
When do you want to retire? – 60? 65? How many years is that from now? Will you be able to retire at 60 or will you have to push on till 65?
A retirement plan will take all the guesswork out of the equation.
A retirement plan shows the time value of money
Maybe you’re thinking; Hey, I could quite comfortably live on R10, 000 a month if I don’t have any expenses. Or maybe it’s more like R30,000 a month for you, who knows?
But what will R10,000 a month be worth 25 years from now? A month’s worth of groceries?
So, now the question becomes: What will the equivalent of R10,000 in today’s money be 25 years from now? R30,000 a month? R90,000?
Let’s say for example that you need R30,000 a month when you retire. But R30,000 isn’t going to cut it in year 2 of retirement, never mind year 5. By then you might need R40,000 a month.
So, how do you work out how much money you’ll need over 25 years if you want your income to increase every year?
And no, the answer can’t be found by adding 10% to each year’s income over 25 years and multiplying that by 12 months. That’s because you’re investing your pension, which will hopefully grow, meaning you need less money to start off with.
A retirement plan will work all of this out for you.
A retirement plan gives you a measuring stick
Take that pilot story again. He or she takes off and forgets where they took off from. Yes, we know this never happens in real life, but stick with us. If they don’t know where they started from, how will they know how far they’ve progressed?
Let’s take this to retirement planning.
You have this wonderful plan drawn up, and in it you project that your pension fund will grow at 10% every year until retirement. But over the next 5 years your pension fund only grows at 2%.
To get back on target, you’ll either have to invest more money to make up the shortfall, change the funds you’re invested in, or change your goal.
Question is: How will you know if you’re off target unless you have a plan drawn up every year?
In the spirit of “Indlovu ayisindwa ngumboko wayo” we would like to leave you with this. It’s never too late to start. You might be feeling a little depressed that you haven’t really got your retirement planning on track, but step one is working on a plan that you can measure each year.
Until next time.
The Wise About Life Team