RETIREMENT PLANNING: THE SIGNIFICANCE OF RETIREMENT
Previously, we went through the overview of retirement. In this article, we will now explore its significance, before discussing how to map out a successful retirement.
Why do we need to take our retirement into our own hands in the first place? A frivolous question, right? But you might be surprised to learn the key components of retirement planning is entirely different from the popular belief. Moreover, doing it right is a must for a financially secure retirement.
However, some people do not subscribe to what retirement can do to one’s life, in terms of finances. They believe Social Security and pension benefits are sufficient to sustain them in their golden years. Let us clarify that notion: The prospects of government-backed retirement are not good. The developed world’s populations are continuing to age, as the number of working individuals contributing to Social Security systems has declined substantially through the years. In 1940, there were 35.3 million covered workers with only 222,000 beneficiaries. In 2010, there were 156.7 million covered workers with 53,000 beneficiaries.
A similar pattern appears with other pension system, including in several European countries. At the same time, greater and greater burdens are being put on the system, as more and more individuals retire and live longer due to advances in health care. Same thing with private pension plans. Corporate downfalls such as the bankruptcy of Enron can wipe out your employer-sponsored stock holdings instantly.
Supposedly, defined-benefit pension plans assure participants a particular monthly pension during their retirement years. Unfortunately, it drops every now and again. In some cases, such plans require raised contributions from benefit reductions, plan sponsors, or both, in order to maintain their operations. Also, many employers used to provide offer defined-benefit plans. Now, they are obtaining defined-contribution plans since the former has increased liability and expenditures. Hence, an uncertain financially security for many.
Given all of these, financing retirement has been transferred to people. They have no choice but to take care of it.
Next, failure of a Social Security system may or may not happen. But planning your retirement on funds beyond your control is definitely not the best option. With or without that risk, one should realize these benefits will never give a person a financially adequate retirement. Social Security programs are designed to give a basic safety net, a minimum standard of living for one’s old age.
Having said that, granted you do not add your own savings to the mix, it will be difficult – if not impossible – to enjoy above the minimum standard of living provided by Social Security. This situation is not that alarming unless your health takes a toll on you. Normally, old age brings medical problems and more expensive healthcare costs. If you do not have your own nest egg or emergency fund, living out your retirement years while covering your medical expenses may become a burden to you, especially if your (or your loved ones) health condition begins to worsen. To prevent any unforeseen illness, you can obtain a health insurance like medical and long-term care insurance to fund any health care needs in the future.
Let’s talk about estate planning, which is often overlooked in retirement planning. For discussion purposes, add into the equation your family and loved ones. A portion of your retirement savings can contribute to the lives of your children or grandchildren, either by funding their education, allocating part of your nest egg, or retaining sentimental assets, including land or real estate within the family.
If one does not have a well-planned retirement fund, you may be forced to liquidate your assets to shoulder the expenses during your golden years. Should that happen, it will prevent you from leaving any estate to your family, or worse, make you a financial burden to them.
So why plan your retirement if unforeseen illness, as well as uncertainty of Social Security and pension systems are inevitable? Did we already mention inevitable? In essence, retirement planning aims to avert, or counter at least, any unanticipated hurdles or financial hiccups a person may encounter during retirement. In simplest terms, to prevent inevitable problems in your golden years.
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