What is a retirement plan?
A Retirement Plan is a personal investment. It is important to start investing in a plan when you are young. Working on several investment options is a good idea. If you invest in a major index, set aside savings for retirement and work for a company that offers a decent pension plan, you are doing a lot of wise things that will help you immensely later on. A word about pensions though - they are investments, as we stated - so they will go up and down in value.
Most countries have retirement savings plans that help reduce taxes. They have ways to reduce the taxes during your working years and into your retirement years. Make sure to check out the rules and regulations in your own country. The various plans may affect the values quite drastically. Many people wind up getting a lot less then they expected.
How to save for retirement.
There are two parts to saving for retirement:
- Planning how much will be needed upon retiring. Retirement is a long way off for most people and no one knows how long they will live in retirement. Therefore, planning for retirement is a guess. A very big guess. None the less it can be done to a reasonable degree. What with the advent of computers, we can now access great calculator programs that can figure out how much might be needed. The main way to do this is to figure out how much will be needed in a similar way to budgeting. You figure out how much housing, food, transportation, etc will cost per month, then multiply it by 12 months and then by however many years humans basically last past their expected retirement age. Almost all financial institutions have calculators that will help estimate retirement costs. Being that so many factors come into play over the years most calculators simply estimate a value and a monthly saving plan. The plan should then be up-dated occasionally to see if any changes are necessary.
- Saving up for retirement is necessary. This is a long-term goal and it will have its own ups and downs. That is because it is hard to figure out how much is actually needed, how much you'll be able to save, and what will happen to the invested funds. Other factors will also come into play such as company pensions, possible property values (it is likely that some downsizing will occur and some property profit may occur from the sale), national pension plans, and personal retirement plans. If a person is lucky enough, they may wind up with a company pension plan that will cover all of the necessary costs. However, it is impossible to plan for such an event because a person may work for a while, at such a company but they may not stay at the company until retirement. Of course, if a person does last a long time at such a company then the retirement savings may be used differently after all.
It is wise to plan for all possible incomes but remember that all incomes might not materialize exactly as planned. Inheritances may be much smaller or property values may drop. Plan on receiving only about half of the hoped-for values.
Pensions
There are two types of pensions, government and privately funded. Typically, the government pension is pretty straightforward to understand and access. Private pensions can be much more dynamic and complicated. Evaluating the merits of your private pension plan, perhaps through your workplace, is well worth your while, especially as you age.
Investing: understand that as an investment that will be needed in the future, it is best to play it safe. That means investing in safer investment products like ETFs or mutual funds that invest in major indexes, value stocks, or with blue-chip companies. Most funds should be in safer investments like these while investments in individual stocks is much riskier and many people make no money doing it so only a small portion of a retirement portfolio should be in riskier stocks. If after a while, the stock portion of a fund is not performing well it is best to go back to investing in ETFs and mutual funds.
Investing for retirement will require picking an institution or institutions and what instruments to invest in. See: Investing
When to save for retirement.
The longer one saves and invests, the better the chance that the savings will accumulate and match your savings goal. It will seem daunting at the beginning, but it is imperative to start such savings early. If it is too hard at the beginning then start with a little bit and it will start adding up. Then add more and more as the years progress. If there are only a government and personal source of retirement funds then it must be realized that if left too long, it will either take a lot of monthly savings to catch up to a reasonable amount of savings or retirement will in the frugal living category.
There are many calculators to help figure out how much to save to reach a retirement goal. They all include variations on income such as government pensions, company pensions, personal pensions and special incomes like the sale of a property, sale of special assets, possible inheritances.
While saving towards retirement, make sure to plan towards eliminating debt before retiring. Debt can really hamper both the savings towards retirement as well as spending during retirement.
+++see what Shanahan can come up with for a chart showing what will happen to savings as they accumulate and what will happen to the savings as they get spent. (see money coach site for an example)+++
+++links to websites for other countries: United States, Canada, Britain, Australia, New Zealand+++ these are the same links that exist on the How to Save for Retirement page
+++link: see our How to Plan for Retirement for more details+++