Do you ever think about retirement, even if it is decades or a few years away? And how would you want to spend your retirement? Are you planning to go back to your farm upcountry and live a reasonably comfortable life? Maybe globetrotting and tick all those destinations off your bucket list?
Whatever the lifestyle you envision in your retirement, there is one thing you can never fail to consider – retirement income.
Yes, even in retirement, we will still need some income, even if we are not indulging in extravagant activities.
Estimating the income in your retirement is not easy. There is no one-size-fits-all strategy. We all have different needs, lifestyles, dreams, and income capacities. However, there is a rule of thumb; you need to have at least 80% of your present expenses for retirement.
Why? Because some of your current expenses might be reduced, like transport costs and retirement contributions. Other expenses might remain the same, while others like healthcare and long-term care might increase.
A simple guideline can lift you from this uncertainty if you have enough retirement income or not. Here’s want you should consider;
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The current retirement age is 60 years for civil servants. However, you can opt for early retirement when you hit 50 years and access your pension funds, including the employer portion.
So, how many working years do you have left? Do you want to go on early retirement or keep working until the legal retirement age? How much will you have in savings by then? Any investments in stocks or bonds? If all the answers are NO, it is time you started thinking about these things.
Don’t forget to consider that sometimes, we live longer than we think we could. So what are the backup plans? It is better to plan for a longer life even if you do not live to see it than to live longer than expected without having planned for it.
Also, if you take early retirement or start dipping into your pension fund immediately, you will be depleting that fund. So, how long do you think that money can last you under such scenarios? Can you postpone receiving your pension fund and still live comfortably? Remember that the money will still be earning interest if you let it sit in your pension fund.
Understanding the Nature of Expenses
Determining a retirement income starts with a clear understanding of what you expect to spend in your retirement. We can focus on two broad categories as following:
Your basic needs are ongoing and prime such as food, shelter, transportation, insurance premiums, health care, and other essentials. Even if you are not paying rent, think about the additional costs of owning a home, like repairs and property taxes. These expenses should come first, and income from your pension funds could cater to this.
This will depend on your retirement lifestyle. They are not essentials, but they are expenses that alleviate the kind of retirement life you envision. Such expenses include vacations, entertainment, donations, among others.
If possible, try having another revenue stream apart from your retirement fund that caters for such. For example, passive incomes, like dividends and interests from investments, could go towards such expenses.
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Think About Inflation
Whatever income you think you will get to cover your expenses, don’t forget to factor in inflation. You can already see the price of foodstuffs and other items keeps soaring every year. And you certainly can’t expect the prices, even for services, to remain the same a year, two or ten down the line.
Inflation has a significant impact on your earnings and buying power. Without the correct financial planning, your savings might not last long to cover the basic living costs. Your shillings will be worth less by the time you hit retirement. So, for every expense that you have in mind, adjust for inflation.
The Math of Calculating How Much is Enough
- The age that you want to retire – the earlier you retire, the more money you will need to save for retirement
- The income you want/need at retirement – think about your lifestyle, current and during retirement, and all the expenses you will incur.
- State pension or personal pension scheme – you need to estimate how much you will receive from your retirement contributions in pension schemes. Will it be enough?
Estimate Your Life Expectancy
If you are in your 20s, you have ample opportunities to prepare for the kind of life you want. Start saving for retirement now, and let your money start accumulating from the power of compounding. If you are in your 40s and onwards, you need to think differently. Do you have other expenses, like college fees for kids or you need to buy or build a retirement home. You can still focus on such while still making minimum contributions to your retirement fund. This way, by the time you are retiring, your pension fund will not go into such expenses. If you are done with such expenses, think about where you can invest your extra money. Maybe increase your individual pension contributions, start a business you would want to run during retirement, among other options.
Identify Your Sources of Retirement Income
How many sources of income will you have during retirement? Do you have a pension fund? Other investments, like real estate, stock, and bonds that will bring regular income? Perhaps a business or farming venture? How much do you estimate you could get per month, quarter, or annually?
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Create a Retirement Goal and a Potential Budget
Setting up a retirement goal will help you create a possible budget. Then, after determining the remaining working years, life expectancy, nature of expenses, and income, make a feasible budget. You can even tweak your current budget.
Make Up Any Income Shortfall
With the estimated budget, does your income from all sources cover the expenses? If there is any shortfall in earnings, look for ways to reduce expenses or increase revenue to make the budget flexible.
Retirement planning is never an easy task, so do not shy from asking for help. You don’t have to do all this planning on your own. Instead, get a financial planner or advisor and let them walk through this with you. Also, talking to a professional will help you stay relaxed and focused, especially when you see no hope.
Retirement is an important life transition. It requires maximum preparation and careful planning before exiting working life. The more you equip yourself with a clear vision and options, the better you can have a good life in retirement. With the above tips and the help of a professional, you can start planning your retirement.