This is really long-term planning.
The following information is solely for the purpose of assisting your retirement planning. YBP recommends that you read up on the internet and talk to professionals about the exact nature of saving up for retirement in each country as they are continuously changing over time.
Because they are trying to secure your lifestyle in a time period that lays ahead, retirement plans are complicated. Depending on what country you’re in the rules will be different. Each countries rules and regulations will have to be looked into.
Different countries
The first thing to know is that most countries have retirement savings plans that help reduce taxes during your working years and into your retirement years. Make sure to check out the rules and regulations in your own country. Canada and the US have similar types. The government will provide a certain amount of income and each person is allowed to contribute to a plan that will provide an additional income. The personal retirement savings have tax benefits attached to them. Britain has a similar setup. Australia and New Zealand, on the other hand, have a slightly different plan. Everyone gets a similar amount upon reaching 65 so long as they have paid into the system. It isn't based on how much and how long they've paid into the system.
Important Elements of your Retirement Plan
Start Early
In North America, retirement is considered such a long time off in the future that most people have a very tough time thinking it is worthwhile to save for. The mindset is usually to start worrying about it when people turn 40.
However, starting younger allows for:
less monthly savings needed to be saved and
a longer period of time for profit/interest to accumulate
Saving from a younger age simply takes a lot of stress off of saving for your retirement.
Let's demonstrate this in numbers:
First Case: You want to retire at 65 and save 400/month (return on investment rate of 5% after taxes)
| Starting Age |
Approx. Amount Saved at the age of 65 |
|---|---|
| 25 | $645,000 |
| 35 | $356,600 |
| 45 | $180,000 |
Second Case: You want to retire at 65 and want to know how much to save to have roughly $315,000 (return on investment rate of 5% after taxes)
| Starting Age |
Monthly Savings Needed |
|---|---|
| 25 | $200/mo |
| 35 | $350/mo |
| 45 | $700/mo |
How much to save
As a rule of thumb, financial planners usually say that you need to save at least 10% of your after tax income plus get a pension plan by paying federal taxes in order to have 70% of your income when you retire. Many financial planners say 15% is better. It really depends on what other sources of income you'll have. Ten percent can mean a considerable amount, especially when you're young and trying to raise a family. However, it will take those funds saved up and invested plus any government-based pension plan to create enough funds to live for 25 years or so without working. Not having enough funds for retirement will result in a decreased standard of living.
The sources of the savings to accumulate all of this wealth are: country pension plans, personal retirement savings plans, company pension plans and and possibly selling family valuables such as your home or car (buy a lesser value home or car and use the profit for your retirement).
How to invest it
The financial market goes through ups and downs in a fairly regular manner. During your saving period, you will hit roughly as many lows as highs. In the first two thirds of your saving period, it makes sense to invest into higher risk plans because you won't need the money for a long time and will have enough time to balance out losses while reaping higher wins. The closer you get to retirement it makes sense to shift your portfolio into lower risk plans. Once at retirement, put enough funds into cash, bonds or very safe ETFs. Transfer most or all other funds to low risk vehicles.
Federal Pension Plans, Company Plans and Personal Plans
In most countries, some of your taxes go towards a pension plan or plans. At some point you will be able to collect a pension to help you live in your retirement years.
Most countries have personal retirement savings plans. The plans reduce your current taxes and you'll have funds to draw from in your retirement years. There are companies that specialize in investing your personal retirement funds for you (like insurance companies) and there are companies that simply put your funds into retirement funds but you control everything. This means that you will have a pre-planned retirement and likely know exactly what you're getting.
Many companies have pension plans whereby the employee puts in funds each pay period (based on a certain percentage or limit). Many companies also match the amount the employees put in. Some people will be smart enough and lucky enough to be able to not only get a good job but keep it for a very long time and be with a company that offers a company pension plan. Those types of jobs and companies are becoming more and more scarce.
Diversify your funds
The usual method of savings is to save up some cash or have the savings directly deposited into mutual funds or ETFs. Some cash should be kept (up to 10% of total portfolio) but at a certain point it should be invested into mutual funds, ETFs, bonds or stocks. Make sure that so you are not overweight in one section of the market. Diversifying is the safest over-all strategy for most investors.
Down or Bear Markets.
Remember that you are investing for the long term. Don't let bear (down) markets spook you too much and don't take all of your money out in fear. Nobody really knows when a real bear market will happen and how low it will last or how low it will go. Only the most savvy investors gamble during bear markets. Selling during bear markets is extremely difficult. Only a small percent of investors will be really lucky to make money during a bear market. Most people simply don't know what will happen from day to day. Having a diverse portfolio is usually the simplist defense against a bear market. If you're really scared your investments will lose value, stop putting the funds into investments for a while. Wait a bit and see if the markets settle down. Then start buying in again while investmens are lower in value. Every down market has come back and gone higher than before. You may not buy in at the lowest point but simply buying in lower means a better chance at profiting.
In Canada, a RRSP account costs over one hundred dollars per year to maintain. That means that you must make over one hundred dollars in profit to grow your account. Make sure that any account that is started can sustain that growth or the funds will deteriorate.
Sample:
You started an account and put $1,000 in it. It makes an average of 5% per annum, the account fees are $125 annually.
$1,000 x 5% = $50
$1,000+$50 = $1,050 - $125 = $975
Obviously, we need to make sure this kind of situation doesn't arise!
Learn more about this complex subject, check the links below:
United States
USA Gov - Retirement
OPM - Retirement - FERS Information
Public Employee Pension Plans in the USA
Wikipedia - Civil Service Retirement System
Fas - Federal Employee Retirement System
Canada
FCAC - Pensions and Retirement
Wikipedia - Canada Pension Plan
Britain
UK Gov - Calculate Your State Pension
Wikipedia - Pensions in the U.K.
Australia
Wikipedia - Superannuation in Australia
New Zealand
Wikipedia - New Zealand Superannuation Fund
Work and Income - Superannuation