Retirement planning is a multi-step process that needs a long term run. To have a safe, secure, and fun retirement, you need to build the financial cushion that will fund it all. The fun part is the reason why it makes sense to pay attention to the serious and perhaps the most boring part: planning how you’ll get there. Let’s start building a solid retirement plan by learning the five steps below.
1. Understand Your Time Horizon
You need to start planning for retirement by thinking about your retirement goals and the total time you have to meet them. Your current age and expected retirement age defines the initial groundwork of an effective retirement strategy. The longer the time from today to retirement, the higher the level of risk your portfolio can withstand. Moreover, you need returns that outpace inflation to maintain your purchasing power during retirement.
Generally, the older you get, the more your portfolio should focus on income and the preservation of capital, which means that a higher allocation in securities, that won’t give you the returns of stocks but will make it less volatile and provide the income for you to use to live on. You will also have less concern about inflation and less issues about the rise in the cost of living than a much younger professional who has just entered the workforce.
In addition, you should break up your retirement plan into various components. For example, you should break up the investment strategy into three periods: two years until retirement, saving and paying for education of your children, and living expenses. A multi-stage retirement plan has to integrate various time horizons, as well as the corresponding liquidity needs, in order to determine the optimal allocation strategy. You should also rebalance your portfolio over time when your time horizon changes.