Thursday, August 4, 2011

How to Retire in a Bed of Roses


What is it that will make our lives comfortable during the golden years? Besides the obvious answer-good health-what we really need is to be financially independent.

To do that, however, we need to have a game plan--one that is not only realistic but also one that needs a bit of discipline to implement. Here are a few steps you can take to realize your retirement dreams:

1. Define retirement goals

Goal definition is like planning ahead and deciding whether you would still be doing some work on a part-time or consultant basis, doing voluntary work, traveling around the world or taking care of your grandchildren.

It is only after you have a rough idea of what you want to do that you can figure out how much money you will need to achieve the lifestyle you desire. This can be easily done with the help of a financial adviser, who will assist you with the aid of computer software to map out a detailed financial roadmap. This person is one that will take into account your estimated expenses, savings, risk tolerance for investments and the effects of inflation in order to build up your nest egg.

2. Start planning early

The sooner you start making plans, the better. This will give you more time to let your money grow by letting the magic of compound interest take its course.

The advantage of starting early is that you will need a smaller monthly or annual outlay to achieve the monetary goals that you have set out to achieve. For example, if you put aside $100 every month. Based on a 10 percent interest per annum, you would be able to see a nest egg of $226,000 by the time you are 55. But if you start saving only at 35, you will need to save $300 a month or three times as much to achieve the same figure.

3. Create a savings plan and stick to it

If you are one of those who is tempted to say "I can't afford to save because of all those household and family expenses, not to mention the money set aside for an annual holiday," well, try this: pay yourself first, every month, before you settle all other bills.

In other words, put aside a fixed amount of money every month, just for yourself. Bank it in first and do not touch it ever! Unless, you are withdrawing it to put the money into a long-term investment for retirement.

If you still think you do not have that discipline, use an automatic savings plan. You can also put a fixed sum into a unit trust investment on such an automatic savings scheme.

4. Educate yourself on investments

Do not just rely on a simple bank savings or fixed deposit accounts to grow your nest eggs for retirement. This is because your "gains" can be easily eroded by inflation over time. You will need to rely on other investments as time goes forward. Studies have also shown that you can get better returns on the stock markets if you invest for the long haul.

5. Find out your risk tolerance

It is important to know how much risk you can tolerate as it will help you decide which investments you want to place your extra funds in.

Risk tolerance may vary with the age group you are in. For example, if you are just starting out or are in your late 20s or 30s, you may be more amenable to putting your money into more aggressive equity funds. But if you are close to retirement, you may want to shift some of your assets into more conservative investment vehicles such as balance or bond funds.

Knowing your risk levels can also help you weather volatility in the stock markets, and rest easy even if the markets are going through a bad patch. This is because when it comes to investing for retirement, it has to be viewed with a long-term perspective.

6. Diversify your portfolio

One of the key tenets of investing is that you spread your risks among different asset classes. This is so that your investments will not suffer because of a particular sector taking a hit or declining because of a cyclical downturn.

If you are not sure of which unit trust to invest, one way of natural diversification is to invest in an index fund, which often mirrors a wide cross-section of a market.

7. Use time, not market timing

Use a buy and hold strategy when you are investing for the long term for your retirement. Do not try to beat the market by getting in and out of the market too frequently. Many studies have shown that this is often an exercise in futility.

While it may be difficult for one to stay calm when the stock market dips and eats into your investments, selling your stock funds out of despair and buying into the safety of money market funds could also be detrimental to returns over the long haul.

8. Adopt a long-term perspective

As a retirement plan is a long-term strategy, do not expect to see results immediately. Historically, despite the fluctuations of the markets, stock market investments (which include funds that invest in stocks) tend to provide returns of 10 per cent to 15 per cent over the long run.

9. Consider insurance

Do not overlook the importance of insurance plans as a means of accumulating funds for your retirement. There are many types of plans available in the market. Annuities, too, are another way to invest for retirement as they pay you a fixed monthly income as long as you live after you retire.

It would also be prudent to purchase some health insurance schemes such as critical illnesses and hospitalization plans, in case you succumb to some form of illnesses that may affect your regular income or worse, incur huge hospitalization bills. That way, you will at least alleviate the need to sell your investments at inopportune times just to settle those bills.
10. Stick to your plan

Bear in mind that your retirement plan is a long-term goal. So once you have built up your investment portfolio according to an asset allocation plan devised with the help of your financial planner or investment adviser, do not let your long-term plans be distracted by short-term returns.

11. Avoid borrowing from your accounts

From time to time, you may be tempted to dip into your nest eggs to fork out the down payment for the new car or house you have always dreamed of. The general advice is that you should not siphon off the funds you have been putting aside for your retirement.

Always invest with the "extra" money that you have, and not on borrowed funds. This is because with borrowed money, you will lose your long-term perspectives.

12. Monitor and review your investment plan regularly

With easy access to the Internet as well as other technology, it is easy and tempting to fall into the trap of checking your investments on a day-to-day or even an hour-to-hour basis. But just remember that unit trusts, unlike stocks, do not experience as much changes in their daily prices. So do not get too obsessive over the tracking of your investments, especially if they are long-term ones.

However, you should review your portfolio from time to time--once every six months or annually--either to fine-tune your portfolio because of changes in market environments; or because of a job switch and a change in your income level, thereby changing your risk tolerance.

Good luck!