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We are starting to hear more and more about retirement planning. But what the hell do you need to know about retirement before retiring? Is golfing every day not simple enough? Why would you care about planning for your retirement? Answer: You are not going anywhere at the age of 55, 60 or 65 if you don’t have money! While money doesn’t necessarily bring happiness, it sure does help make retirement more comfortable!
The very first step before starting to analyze your personal situation is to be aware of what is coming for you in the future. There are 5 financial risks at retirement. DoNotWait.com will cover them all in later posts. Today, we are briefly describing them in general so you can have a clue of why you need so much money to retire:
Healthcare costs
We all know that healthcare costs are skyrocketing in most countries. For folks who think the government will pay all expenses when they are ill, let me tell you that they already have a big actuarial deficit to cover upcoming health care expenses. You might have to go private if you want proper care faster.
If you have a private insurance provided by your employer, I suggest that you double check the terms and conditions of this insurance upon retirement. Some of them are still valid, others expire or reduce the coverage.
Inflation
This is probably one of the smallest yet deadliest of enemies to your retirement plan. How can a small 2 – 3% inflation rate hurt your portfolio and your lifestyle? Well do you know that the orange juice you buy for $3 today will probably cost 4.91$ in 20 years if the inflation rate remains at 2.5%? This means that your grocery bill of $100 a week will go up to $163 over the same period of time. This is 160% of what you pay today!
There are ways to control and prevent inflation, we will see them later.
Time
Ally and foe at the same time 
Time is the fuel that powers compounding interest that will help you build a nice nest egg. However, if you plan on retiring at the age of 60, chances are that you will live another 25, maybe 30 years. This means that if you work from the age of 25 to 60, you will have 35 years to accumulate enough money to pay for another 30 years! This requires a huge savings rate considering that you may build a family, purchase a home and take care of your parents at one point.
Asset Allocation
One thing to remember is that investment returns are directly correlated to investment risks. Depending on your risk tolerance (risk aversion) and your financial situation, different mix of asset allocations are preferable. Should you be 100% invested in the stock market and live with high volatility? Or Maybe you should have a good part of your portfolio invested in fixed income and GICs.
Withdrawal rate
The last financial risk of retirement but not the least is the amount you will need to withdraw from your nest egg at retirement. If you withdraw more than 4% of your capital annually, you will eventually eat it all up. Therefore, it is important to plan how much you need to retire wealthy.
In the upcoming weeks, read months, we will be talking moe about each of these five major risks related to retirement. We will also cover other topics such as investment, tax issues, financial planning tips etc.
