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10 Ways to Financially Prepare for Retirement

10 Ways to Financially Prepare for Retirement

While a number of developed economies throughout the world continue to showcase overt signs of growth, it appears as though everyday citizens are yet to feel the true benefit of this. This is especially true for those approaching retirement age, who, according to a 2013 HSBC report, are facing the prospect of exhausting all state and private pension funds within a relatively short period of time.

The survey, which canvassed the opinion of more than 15,000 respondents across a total of 15 global markets, suggested that the average citizen will have spent his state and occupational pension capital just 14 years into retirement. With the average international retirement length now 18 years, the failure to save can have significant implications for an entire generation of citizens.

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Practical Ways to Avoid Running Out Of Money in Retirement

    This problem can be overcome, although it requires individuals to adopt a proactive approach and consider alternative methods of generating and saving income. By thinking broadly and outside basic pension plans and savings accounts, it is possible to prepare for a bright and financially sound future beyond retirement.

    1. Live a frugal and enjoyable lifestyle

    For anyone who contributes to an occupational pension and is expecting to supplement this income with state funds beyond their retirement, there is a tendency to take a more relaxed approach towards making additional savings. This represents flawed thinking, however, as your ability to live a frugal and financially prudent lifestyle can boost your pension income and correct any potential shortfalls. Although this should not impact negatively on your enjoyment of life, it is important to cut costs where possible and maximise savings, discounts and promotional offers.

    2. Recognise yourself as a viable financial asset

    Beyond savings accounts, pension funds and fixed-rate bonds, you should also consider yourself as a viable financial asset. Equipped with knowledge, experience and a carefully honed skill-set, you have an innate capacity to earn that is likely to be the single most influential factor on the quality of your life beyond retirement. By recognising this quickly and maximising your earnings through activities such as freelancing and consultancy, you can lay the foundations for a financially prosperous retirement.

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    3. Learn to plan rather than save

    Goal setting is key to challenging established thinking patterns and cultivating more positive behaviour, especially when it comes to building and retaining wealth. It is important to set the right goals, however, as saving money is only possible if you can minimise spending, optimise your earning potential, and remain free from debt. This requires considerable forward planning, which enables you to consider your long term financial goals and minimise any risks that may prevent you from achieving them.

    4. Consider the dual benefits of healthy living

    We live in an age of information, where citizens have never been more knowledgeable about health issues and the impact of a poor dietary regime. Cultivating a healthier lifestyle not only enables you to improve physical fitness and live longer, but also provides you with an opportunity to save money by eliminating costly practices such as smoking, drinking alcohol and consuming fast food. Over time, these savings can quickly accumulate and boost your personal wealth considerably.

    5. Take advantage of financial freebies and tax breaks

    Taxation is not only a controversial issue in developed economies throughout the world, but also has a huge impact on your earning potential and capacity for long-term savings. As a financially astute individual, it is important to understand pension plans and tax laws, and use them to your advantage. In terms of private occupational pensions, for example, it is important to ensure that you match the contribution of your employers and access the free capital that is offered. Certain savings and retirement accounts also offer considerable tax breaks, alongside additional investment options that are free from capital gains scrutiny.

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    6. Develop financial literacy as a core skill

    This brings us to the need for financial literacy, which is now being considered as a core feature of the educational curriculum for students throughout developed economies. Without being financially literate, it is impossible to understand staple economic factors such as interest rates and their impact on investment income and earnings. More specifically, it is important to understand how fluctuating interest rates impact alternative investment options, so you can calculate which offer the best financial return at any given time.

    7. Follow economic trends and the course of inflation

    On a similar note, inflation and the cost of living are key economic factors that also impact disposable income levels. Not only is it important to understand these concepts, but there is also a need to follow the real-time economic trends that surround them. For example, it was recently announced that disposable income levels in the UK would not rise until at least 2015. This means that financially-aware consumers can look to regulate their spending and avoid heavy borrowing as inflation continues to rise disproportionately.

    8. Think like an entrepreneur and take calculated risks

    The nature of the global economy has changed considerably since the Great Recession, not least in terms of labour market evolution and the prevailing method of working in developed nations. As a result, we are now in the age of the ‘accidental entrepreneur’, who can be characterised as having a marketable skill and an appetite for taking calculated risks. This kind of mind-set is key when it comes to investing your hard-earned money, as you cannot hope to generate sizeable returns without placing your capital on the line in the first place. In the quest to supplement your retirement income, a slightly risk-averse approach can often deliver the best possible results.

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    9. Never borrow money to fund your lifestyle

    Economic recovery is often driven by consumer borrowing, especially in the modern age where there are a host of new and innovative short-term lending options available. While there is nothing necessarily wrong with this, it can become an issue when you borrow money as a way of bridging a short-term shortfall in income or sustaining an existing lifestyle. This leads to the cultivation of cyclical and long-term debt, which can slowly eradicate your savings over time. With this in mind, you should only ever borrow money with a clear goal in mind (such as an investment) and if you have calculated the potential risks and returns.

    10. Be proactive and continually look for new opportunities to save

    Above all else, your capacity to save money and boost your private pension income relies heavily on your outlook and financial philosophy. Even if you are in full-time employment and saving a considerable amount of money each month, it is crucial that you continually look for new opportunities and vehicles through which you can maximise your income. This type of proactive approach will reap significant rewards over time, especially for younger citizens who are still developing their career path.

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    Last Updated on September 2, 2020

    How to Set Financial Goals and Actually Meet Them

    How to Set Financial Goals and Actually Meet Them

    Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

    In this article, we will explore ways to set financial goals and actually meet them with ease.

    4 Steps to Setting Financial Goals

    Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

    1. Be Clear About the Objectives

    Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

    It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

    Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

    2. Keep Goals Realistic

    It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

    It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

    3. Account for Inflation

    Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

    Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

    For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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    4. Short Term Vs Long Term

    Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

    As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

    By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

    How to Achieve Your Financial Goals

    Whenever we talk about chasing any financial goal, it is usually a two-step process:

    • Ensuring healthy savings
    • Making smart investments

    You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

    Ensuring Healthy Savings

    Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

    This is the focal point from where you start your journey of achieving financial goals.

    1. Track Expenses

    The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

    Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

    If you’re not sure where to start when tracking expenses, this article may be able to help.

    2. Pay Yourself First

    Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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    Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

    The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

    Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

    3. Make a Plan and Vow to Stick With It

    Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

    Nowadays, several money management apps can help you do this automatically.

    At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

    Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

    You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

    4. Make Savings a Habit and Not a Goal

    In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

    Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

    • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
    • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
    • If you go shopping, always look out for coupons and see where can you get the best deal.

    The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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    5. Talk About It

    Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

    Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

    6. Maintain a Journal

    For some people, writing helps a great deal in making sure that they achieve what they plan.

    If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

    When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

    Making Smart Investments

    Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

    1. Consult a Financial Advisor

    Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

    Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

    2. Choose Your Investment Instrument Wisely

    Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

    Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

    As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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    3. Compounding Is the Eighth Wonder

    Einstein once remarked about compounding:

    “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

    Use compound interest when setting financial goals

      Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

      Start saving early so that time is on your side to help you bear the fruits of compounding.

      4. Measure, Measure, Measure

      All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

      If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

      Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

      The Bottom Line

      Managing your extra money to achieve your short and long-term financial goals

      and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

      More Tips on Financial Goals

      Featured photo credit: Micheile Henderson via unsplash.com

      Reference

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