Saturday, June 20, 2009

Why financial planning for retirement is important

If you even think that it's going to rain heavily you may consider the umbrella or other courses of action in anticipation. This analogy could be applied to retirement, except that you can prevent the rain from falling too heavily if you plan properly. There are two main reasons why it is important to save for the golden years. The first is uncertainty. For the majority of us, earning power will be lost at retirement, through illness or disability. Saving would enable us to have money working for us even if we were not able to work ourselves.
The second motivation to save is financial independence. Quite a few people despise their jobs or would like to enjoy the product of their work while they have enough sufficient time in which to do so. This is why retirement planning is essential. Retirement planning is a process through which people can determine how much they need to save for a comfortable retirement.

We need to be up front about the prospects of government-sponsored retirement - they're not very good. As we all know, the developed world's populations are continuing to age, with fewer and fewer working-age people remaining to contribute to social security systems.

For instance, consider that according to a 2005 study by Stephen C. Goss, chief actuary of the Social Security Administration, the ratio of covered workers versus the number of beneficiaries under the U.S. Social Security program has been reduced significantly over the years. In 1940, there were 35.3 million workers paying into the system, with only 222,000 beneficiaries - a ratio of 159 to 1. In 2003, the number of workers increased to 154.3 million, with 46.8 million beneficiaries - a ratio of 3.3 to 1.

A similar pattern exists with other pension systems, including those in many European nations. At the same time, greater and greater burdens are being placed on the system, as more and more people retire and, due to advances in health care, are living longer than ever before.

This "double-whammy" effect holds the potential to put significant strains on the system and could leave governments with no other viable option but to reduce social security benefits or suspend them altogether for all but the poorest of the poor.

Private pension plans aren't immune to shortcomings either. Corporate collapses, such as the high-profile bankruptcy of Enron at the turn of the century, can result in your employer-sponsored stock holdings being wiped out in the blink of an eye.

Defined-benefit pension plans, which are supposed to guarantee participants a specified monthly pension for the duration of their retirement years, actually do fail every now and again, sometimes requiring increased contributions from plan sponsors, benefit reductions, or both, in order to keep operating.

In addition, many employers who used to offer defined-benefit plans are now shifting to defined-contribution plans because of the increased liability and expenses that are associated with defined-benefit plans, thus increasing the uncertainty of a financially secure retirement for many.

These uncertainties have transferred the financing of retirement from employers and the government to individuals, leaving them with no choice but to take their retirement planning into their own hands.

While the failure of a social security system may not occur, planning your retirement on funds you don't control is certainly not the best option. Even with that risk aside, it's important to realize that social security benefits will never provide you with a financially adequate retirement. By definition, social security programs are intended to provide a basic safety net - a bare minimum standard of living for your old age.

Without your own savings to add to the mix, you'll find it difficult, if not impossible, to enjoy much beyond the minimum standard of living social security provides. This situation can quickly become alarming if your health takes a turn for the worse.

There are few people who do not acknowledge the value of saving in general. However, several of us approach planning in a haphazard way. Even if they are putting aside a hefty sum of money in a dedicated retirement plan, they have no idea what their retirement goals are. Without goals, there can be no plan really. Admittedly, there is a lot more to retirement than finances. However, you do not want to have fewer choices during retirement than you do now. If you think that you are saving in earnest for retirement already, then you must know how much of your pre-retirement income you need. Even if you are saving in a dedicated retirement plan, you need to evaluate your savings constantly. This is clearly different from stashing away some funds in a plan and ignoring it until retirement.
Switching to a more positive angle, let's consider your family and loved ones for a moment. Part of your retirement savings may help contribute to your children or grandchildren's lives, be it through financing their education, passing on a portion of your nest egg or simply keeping sentimental assets, such as land or real estate, within the family.

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years. This could prevent you from leaving a financial legacy for your loved ones, or worse, cause you to become a financial burden on your family in your old age.

As we know, life tends to throw us a curve ball every now and then. Unforeseen illnesses, the financial needs of your dependents and the uncertainty of social security and pension systems are but a few of the factors at play.

Regardless of the challenges faced throughout your life, a secure nest egg will do wonders for helping you cope. Financial hiccups can be smoothed out over the long term, provided that they don't derail your financial plan in the short term, and there is much to be said for the peace of mind that a sizable nest egg can provide.
It seems to be human nature also to wait until something is high priority or reaches a critical point to start paying attention. However, I have actually met a few people who were satisfied years into retirement. The common denominator was planning- both psychological and financial. They were even favorably busy in their retirement as they had many things to do. Are you so absorbed in your work that you could not be bothered about family, hobbies and your finances even? Then you're well on your way to permanent unhappiness throughout retirement.

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