You need a retirement plan. Not because you need a retirement plan, but because you need to go through the planning process.
It is the process that sets you up for a successful retirement. The plan itself is just wishful thinking on how your life will work out. As John Lennon famously pointed out, “life is what happens while you are busy making other plans”. One moment your retirement pot is overflowing, the next it is half empty, and your former spouse is driving off in a brand new Mercedes. No retirement plan ever builds in those kind of twists (or that level of short-sightedness).
So don’t even bother printing out your plan. But do go through the planning process.
It will de-mystify the topic and remove the ‘fear factor’.
There is an army of financial advisers and brokers out there who make a living off your fear of matters financial, and off your savings. Confront your fear by doing your retirement plan, and you won’t be one of them. You will literally save yourself hundreds of thousands of rand in costs and sub-optimal returns.
It will help you grasp the body of knowledge.
It is easy to feel overwhelmed by the sheer volume of information, options and opinions on the topic. But once you confront the required body of knowledge, and realise how small and simple it all is, you will easily separate the industry’s marketing chaff from the stuff you actually need to know. Financial independence in retirement is a realistic, achievable goal once you follow the essentials of investing.
It will set you in motion.
The planning process is the ‘unbalanced force’ that will inspire you to get your savings affairs in order – either by starting your own plan, or by taking a critical look at your current arrangements and contribution rate.
It will force you to set a goal.
To achieve a secure retirement, you need to define a secure retirement. Planning for retirement will force you to apply your mind to this topic: how much do I need to enjoy a comfortable retirement? It is possible to put a value on this number, despite the many unknown variables, such as your retirement age, your lifestyle at that time, future inflation and market returns, and your life span. Financial planning tools such as the 10X Retirement Calculator can help you quantify your goal.
It will motivate you.
Once you know your goal, saving for retirement will cease to be a Sisyphean task– the pursuit of a goal that is forever out of reach and therefore pointless. Now there is a finish line. And once you can see that, and how each step brings you closer, then seemingly insignificant actions – such as paying your monthly contribution or steadily raising your contribution rate – become meaningful. Goals are so much easier to achieve if you break them down into small, manageable steps, and you can measure your progress.
It will dispel illusions.
Depending on your age, gender, marital status and expected retirement date, you will have to save anywhere between 15% and 30% of your monthly salary, to get to your goal. You may not be able to afford the required rate, but it will rid you of the notion that saving 5% or 10% of your salary will set you up for a comfortable retirement.
It will cure you of your stock market phobia.
Planning will educate you on the return you must earn on your contributions, to make your retirement equation balance. And on the return you can expect to earn from different asset classes over the long term. And once you learn how different asset classes perform and behave over the long-term, you will no longer fear short-term share price volatility.
It will open your eyes on fees.
The planning process will alert you that small changes to your expected return have a big impact on your long-term savings outcome. You will become wise to the long-term impact of high fees, a too conservative portfolio mix, or an underperforming active manager.
It will convince you to preserve your retirement savings when you change jobs.
Cashing in your retirement fund means that you must start from scratch, but now with a lot less years in the bank to reach your goal. Once you understand how much you then need to save, to still balance your equation, or how much less retirement income you will have to make do with, you won’t have the stomach to spend your retirement fund on a flash new car.
It will bring you peace of mind.
If you don’t worry about your retirement early on, you will worry about it for the rest of your life. It’s a terrible trade-off. Address the problem when you are young(ish) and you will spare yourself many sleepless nights later on.
Simply by going through the financial planning process, you will become a more informed investor, able to make competent financial decisions on your own. You will be in control of the process and the outcome. You will be able to anticipate your retirement with confidence, so much so, that every now and again you will get the urge to shake hands with your younger self and say “Thank you!”
Your alternative is to do nothing and hope for the best. But as Benjamin Franklin observed, “He who lives on hope will die fasting.” In this case, you can take that literally or metaphorically.