Most people may have funds to use during retirement, but don’t know how to allocate them properly. On the other hand, some do not plan for retirement at all, avoiding sufficient investments while they are young. Whatever situation you view, retirement planning must be done while you are young and earning a regular source of income. In every stage of life, there are some financial obligations to fulfil for which you may save your hard-earned money. For instance, you may save for your child’s further education, or for some medical contingency. However, with some people, retirement saving is far from the mind.
What you tend to see, even if individuals save their wealth, is an entitlement to spend whatever is saved, not on a solid retirement plan of investment. You may suddenly, at retirement, feel a sense of entitlement that arises out of fulfilling your obligations while you were working. Nonetheless, whatever the case may be, a strict retirement plan needs to be in place.
What is the 30:30:30:10 rule of saving for one's retirement?
Most financial advisors suggest a rule that states that 30% of funds can be used for inheritance (provided you have children), 30% must be invested to grow wealth (in any hybrid instrument like debt and equity), and 30% used for living retired life. The 10% that is left over should be kept aside as an emergency fund, invested in assets that offer liquidity quickly. In case you have a pension plan fund, along with your savings, you can use this to make your 30:30:30:10 saving rule materialise.
This rule can be best illustrated with a case study in which, at first, a retired person doesn’t realise the need for any kind of saving, but to be self-indulgent with funds during retirement. However, upon closer scrutiny and sensible fund allocation, the 30:30:30:10 rule can be a good way to allocate savings for retirement.
The Case Study - Assuming an individual saves a healthy corpus for retirement, allocating it in the right way can help the individual sail through the life in a comfortable way. Individuals have a bucket list of things they wish to do during their retirement, and some of these include costs to be borne for aspects, like buying a new car, funding foreign trips, etc. The important aspects in retirement planning, like bearing costs of emergencies and the like, are rarely considered.
In the case study, a single parent was on the verge of retirement, having accumulated a significant sum of money for her retirement. With a daughter earning her own money, the lady had no dependents and wanted to give her extremely spacious flat and a few investments to her daughter as an inheritance. After retiring, the lady decided to be thrifty in nature and spend the rest of her considerable funds on herself, with vacations planned as well as some unneeded but lavish home renovations. Fund depletion is almost always a certainty with such a retirement plan.
The argument for spending freely was that this lady had performed all of her responsibilities as a single parent her entire life, worked tirelessly to fund her daughter's education and put her on a decent professional path. Now was her time to shine, she felt, to enjoy the money she had saved for deferring all the expenses she had sacrificed while working hard. Fortunately, the lady had a wise friend who put her on the correct track with the 30:30:30:10 guideline for retirement planning.
Since the lady’s daughter was well on her way to a good career and earning enough to support herself, with decades in hand to make fruitful and riskier long-term investments of her own, the lady would not have to leave her a large inheritance. Hence, the lady could afford to sell her large flat, and instead go and live in an equally high-standard retirement facility, buying a one-bedroom unit there. The rest of the funds from the sale could be allocated to more funding for retirement, and any emergencies. With more wealth in hand, the lady in question could apply the 30:30:30:10 rule, with enough room for emergencies and indulgences, inheritance, and investment, in place. Inflation would be part of the computation, and requirements of this could be met too.
Pension plans are solely not enough to meet retirement expenses. You may want to consider all your mandatory expenses and add inflation to the ultimate retirement plan picture. If you know the 30:30:30:10 plan, you are able to allocate funds accordingly, while you plan when you are young and earning a salary. One of the ways to allocate your funds sensibly, and plan for your retirement needs would be to look at life insurance.