If you are thinking of starting your retirement, most likely your train of thought is you are prepared to set aside $xxxx/month to get started. Now you are on a look out for the best instrument to put your $xxxx/month into.
Assuming I am right about your train of thought, here's why I think this approach is not the best way forward. Suppose you do invest the $xxxx/month amount you decided upon, would you be able to quantify how much closer are you to your retirement besides the dollar value? How many percent progress have you made?
Establish your retirement goal first
When we decide on how much money to allocate to retirement planning and start looking out for an instrument to place our money in, without first establishing our retirement goal, it's akin to go on a treasure hunt without knowing where the treasure is on the map.
You can't track your progress without a goal
There's no way to know how much mileage would setting aside $2,000/month at a rate of return of 5% per annum mean to your retirement without establishing the goal.
Guess what? Most people plan their retirement this way. Which is also why, at some point, it's not exciting to plan for retirement because you have no idea how much progress you made.
Would you like to go treasure hunt without any clue whether you are moving closer to the treasure or still miles away, especially if you have been treasure hunting for a period of time?
You won't be motivated to allocate more funds without a goal
Let's face it, the amount you decided to set aside to get started on retirement planning is unlikely the total amount you truly can afford to set aside for the long term. You probably decided on this arbitrary figure based on what feels like a comfortable amount to start something.
I would do the same if I adopted the 'let's get started without a plan approach' too. Why would anyone want to allocate a substantial amount of their savings to something which seems like a black hole?
In financial planning, it's not uncommon for clients to think they are perpetually buying plans but it always seems not enough. On the other hand, if there was something tangible even if it's a $10million dollars bungalow, if it's something you want, now you can work backwards feasibly.
Shiny objects all look attractive
When we do not have clarity of our retirement number, we will probably cast our net as wide as possible to anything that looks attractive. Hopefully, something hits a homerun.
Over diversification might end up as over diworsification. It's quite hard to decide when to say No and when to say Yes other than based on your affordability. This is probably the most unsophisticated way to approach retirement planning.
Instead, with a clear retirement goal in mind, we know exactly what is needed for retirement, how much is needed and when we need it.
You know exactly how long the journey will take, what to prepare and when do you need to stop treasure hunting because you found the treasure. You will probably be more confident on the journey and you won't take unnecessary risk.
In the financial planning sense, if the goal is to retire at 55, you won't put your long term funds into an instrument that matures when you are 40. You won't set aside $500/month at a rate of return of 5% hoping to achieve $2million by 55 if you are already 35.
It gives you an idea whether you need to earn more money
One of the biggest gap in retirement planning lies in retirement goal and resources. There are instance when the clients do not have a sense of urgency to upskill and improve their earning power until much later in life. By then, the runway to retirement planning is also much shorter.
When we work for people, we are really creating value for our employers. Retirement planning is for ourselves. Hence, it makes sense to consider options that increase our earning power such as further studies, switching jobs and even mid-career switches.
Without clarity of our life goals, it can be challenging to find the impetus to step out of our comfort zones and take massive action.
If we are serious about retirement planning, how should we go about it?
Decide how your retirement lifestyle would look like.
Work out your retirement numbers.
When do you want to retire?
Plan with contingencies in mind like unexpected health issues
Often, there are blind spots in these considerations so it might make sense to do this exercise with a retirement planning specialist.
Only after you have established your retirement goals, then you will know how much you need to allocate to your retirement and choose the instruments which are suitable. To quote Stephen Covey - begin with the end in mind.
After reading this article, you might be keen to have a discussion on retirement planning with me. You can reach me by dropping me a message.
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About Janice I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. I am also building a team of financial advisors who are committed to help responsible individuals attain their goals without misallocating their resources. Do reach out if you would like to explore a career with me.
Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.