Retirement is the culmination of years of hard work. It’s a time to relax, enjoy life, and reflect on everything you have accomplished. While the future might seem far off, the reality is that it is not. You need to start planning for your retirement as early as possible to ensure financial independence later in life.
If you are wondering how you can retire comfortably, there are steps that you can take today to ensure a successful retirement. Here are 10 tips for a successful retirement.
What is retirement planning?
Retirement planning is the process of determining how much money you will need to live comfortably after you retire. You will need to make decisions on how to generate income, how to invest your assets, and how to protect your assets from inflation and other risks.
When planning your retirement, you must figure out how much income you will need to cover your basic expenses. You will need to account for inflation and estimate how your expenses will change over time. In addition, you need to figure out how long you expect to live and whether you will need to generate income to cover healthcare costs.
Retirement planning process
The retirement planning process will assist you in managing your finances and retiring comfortably. Here are key steps and considerations when planning your retirement.
- Determine your retirement goals. You need to assess your situation and know how you want to retire. Here are a few questions you need to answer.
- i) When do you want to retire?
This is a key question as it will determine how much you need to start saving for retirement. If you opt to work for longer, up to 65 years, you need to save less as compared to someone who retires early.
ii) Where do you want to live after retirement?
Do you plan to live in the same area or move to a different location? If you plan to live in a different location, do you have a home or need to build one? Determine the cost of living where you want to live after retirement.
iii) How will you pay for your living expenses?
Have you made any plans on how you intend to pay for your living expenses? Do you have a pension plan (retirement plan)? Have you invested in income-generating activities that will earn you money?
- Figure out how much money you will need for retirement. You need to have a good estimate of your living expenses and any other costs you may have in retirement. Here are some basic steps to help you determine how much you will need for retirement.
- Determine your current living expenses. The best way is to use your monthly budget, as it gives an accurate amount of how much you need every month. Add up your monthly expenses to get your yearly expenses. If you have a medical condition, make sure you cover the expenses adequately. The recommendation is that you will need up to 80% of your current income for retirement.
- Subtract your current pension savings. If you have a retirement or pension plan, use the pension plan statement to see how much you have saved so far.
- Multiply your net living expenses by 25 years, 30 years, or more. The number of years you use depends on your retirement age. If you retire early, there will be more years.
Note: It’s advisable to avoid withdrawing more than 4% of your retirement benefits every year to ensure they fund your lifestyle for at least 30 years.
- Now you have the approximate amount of money you need to retire. Consider inflation and taxation. For instance, in Kenya, if you withdraw your retirement benefits before you hit 65, they will be taxed. The first Ksh 300,000 is tax-free, but anything after that is taxed. Any lump sum withdrawn by anyone 65 or older, on the other hand, is tax-exempt.
- You should begin investing your retirement savings based on your needs. You need to choose the right savings and investment plan. Take the chance to invest in the pension plan the employer offers. If you are self-employed, make sure you have invested in an individual pension plan.
- Review your retirement plans regularly. Update your estimates based on your needs.
8 Tips for Successful Retirement Planning
The best approach when planning your retirement is to start early and tailor your plans to suit your individual needs and circumstances. Here are tips to help you plan for your retirement.
- Start early and save regularly.
The earlier you start saving and investing, the more time you will have to grow your money. Even if you can’t afford to put much away now, start saving something every month. With time, it will grow, and you will be glad you did when you finally retire.
- Know how much you need for retirement.
You need to know how much you need to retire comfortably, as this is one of the most important pieces of your retirement planning puzzle. With this information, you can comfortably set your retirement goals.
Your retirement needs depend on several factors, including your lifestyle, health, and whether you plan to retire early. You can use a retirement calculator or your budget summaries to get a better idea of how much money you’ll need to retire comfortably.
- Consider future emergencies.
You will need an emergency fund even after retirement. It’s therefore important that you continue maintaining an emergency fund. Consider saving an extra amount of money to cover future emergencies.
- Diversify your investments.
Make sure you have a diversified portfolio. Invest in a variety of different asset classes, such as stocks, bonds, and real estate. This will help you mitigate risk and maximize returns.
There are several different ways to diversify your portfolio. One method is to invest in different sectors. For example, consider investing in a mix of high-growth and value stocks. Another way to diversify your portfolio is to invest in different asset classes. This could mean investing in a mix of stocks and bonds.
- Consider the impact of inflation on your retirement benefits.
Inflation will have an impact on your savings. Over time, the cost of living tends to go up, which means that your retirement benefits may not be worth as much as they are today. This may make it difficult to cover the cost of your needs in retirement.
It’s important to remember that inflation is a long-term phenomenon that varies significantly over time. For example, in Kenya, the inflation rate was 5.7% in January 2020, while in November 2022 it hit the 9.5% mark. This means the retirement benefits you had saved for 2020 have lost an additional 2.8% of the purchasing power.
You must consider and look for ways to combat inflation in your country. There are a few ways to combat the effects of inflation, such as by investing in assets that tend to go up in value over time. Make sure you are aware of the impact of inflation on your retirement benefits and adjust your plans accordingly.
- Understand the impact of taxes on your investments.
You need to know the effect of tax on your investment and retirement benefits. For example, any capital gains attract a 15% withholding tax (WHT), while dividends attract 5% WHT in Kenya. When calculating expected returns, make sure you calculate the after-tax returns.
Knowing the tax implications of your investments can help you make more informed decisions about where to invest your money. It can also help you maximize your return on investment by taking advantage of tax-advantaged investment products.
- Be ready for early, unplanned retirement.
Many times, employees are forced to leave work before they attain their retirement age. With the onset of COVID-19 and advancements in technology, a lot of companies have changed how they work. This has made it necessary for most organizations to restructure, sending a lot of people into early retirement.
With this in mind, it’s important to start planning for retirement immediately.
- Invest in your health right now.
One of the best things you can do for your future self is to invest in your health right now. When you are healthy and vibrant, you can enjoy your retirement. However, if you don’t take care of your health now, you may find yourself struggling in retirement.
Some of the things you can do to retire comfortably are to eat healthy foods, exercise regularly, get adequate sleep, and see your doctor for preventive care. All of these things will help you stay healthy and active in retirement. So start making your health a priority today.
Why retirement planning is important
Retirement planning is important for several reasons.
- You will have enough money to support yourself during retirement.
- It helps you think ahead and plan how you will use your time during retirement.
- You will be able to plan for medical costs, which may take up a large chunk of your retirement benefits if not well planned.
- Helps you with tax planning and maximizing your savings.
- Gives you peace of mind.
- It will help you make better career and financial decisions.
- In the event of forced early retirement, you won’t be scared or worried.
- Become a cool grandparent with all the good things money can buy.
Planning your retirement is important for anyone who wants to have a successful and comfortable life during the sunset years. Start saving early and have a solid understanding of your expenses. Knowing how much money you will need to cover your expenses in retirement is crucial to ensuring that you have enough saved. Make sure to factor in healthcare costs, taxes, and inflation. We would like to hear from you. Have you made retirement plans?