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Establishing a Retirement Fund

To establish a retirement fund, investors need to create a retirement plan so they can meet the rate of return required to reach a target. Learn more!


Preparing to retire?

A retirement fund is your lifetime security that you use after your retirement to meet your daily basic needs. A retirement fund needs to be created very carefully as this is probably going to be your ‘final game’. This is the very last fund you get to create in your professional life and the future usage of this fund will be entirely dependent on you.

This fund can also be taken as a pension fund which pays out after your retirement. This fund is probably enough for your basic needs, but not enough to meet the cost of other activities you planned for your retirement. Thus, many employees will aim to create an additional private fund, separate and in addition to those maintained by a place of work or country’s social services.

There are many people who will advise you in creating your retirement account and where you should invest your retirement funds. They might even confuse you as each advisor will have his/her own ideas.

There are many things that you can do with such an account. For example, you could invest your retirement funds in low-risk stocks. Whatever you do, most people will also have a company pension to use in retirement as well as the state pension. The key to establishing this fund as a supplement to your fund is to follow some well-thought-out and obvious steps.

Key Questions for Establishing a Decent Retirement Fund

1. How do you build an annual income that will sustain your family when you have retired?

You need to find a budget planning tool and capture all your expenses when thinking about this fund. Once you have done this, you need to consider what level of expenses you will have once you have retired.

You might have mortgage payments now, but maybe you will finish paying the mortgage by the time you retire. So, take out expenses you won’t have like the mortgage etc. and add in ones that you don’t have much of now, but might when you retire such as travel, medical and hobby expenses.

2. What is the annual income you require to live on in retirement? What size of pension pot do you require?

If you have done accurate budget planning as discussed in the first part, you will have come up with a figure that represents your required annual income once you retire.

3. What is your time horizon? Do you want to retire when you are 65?

You need to decide when you are going to retire so that you know how long you have until you get the money needed for the required annual income. Using a retirement fund calculator will enable you to see how much you need to invest and save to achieve your annual income goal.

4. How much can you save?

With thinking of establishing any form of savings, there are events that are in your control and some that aren’t. For example, the amount you save or invest each month is entirely within your control, so you can decide to invest earlier while you have a good income and job rather than wait and risk having events such as health or redundancy blow a hole in your plans.

5. Different assets provide different growth rates; what should be the mix of your portfolio?

You will need to play around with a calculator to work out the rate of return needed to meet your retirement goals. Be realistic and go for a reasonable rate of return.

For example, stocks have been averaging a rate of return of 7% over the last 50 years. This seems a reasonable rate of return to aim at; however, it is not always guaranteed you’ll be receiving this amount as a return. The market is in constant fluctuation and it is always vital that you never place all your eggs into one basket.

Having established your retirement investment plan, you now need to create a diverse investment fund of stocks and bonds which realistically can give you the rate of return you require to meet your target.

The Best Retirement Plans Out There

401 K

This is a retirement fund plan that is offered by your company. It is advisable that you make sure your company actually offers this before making any other plans. Basically, you will be saving a certain amount each month while working; the amount you can save is dictated by your region, so be sure to check what this is. Your company will then match your amount by a certain percentage which will become available once you have retired.

Keep in mind that if you withdraw any money from this fund before reaching a certain age, you will incur a 10% penalty on your total funds saved. There are a few variations on the 401K, such as the 403b and 457b plans, which are usually only offered to government employees.

Individual Retirement Accounts

Also commonly referred to as an IRA, this is what is known as a tax favoured investment account. This type of retirement plan requires a little more dedication, as the funds in this account are used to make investments in mutual funds, bonds and stocks.

If you’re clued up on these markets, you’ll most likely be making the choices of where to invest yourself. However, it is also quite common practice to get professionals to do this for you which may be the smarter option if trading stocks is not your forte.

Employee Sponsored Plans

There are two different types that fall under this plan. The qualified retirement plan which offers a few tax benefits due to it meeting certain criteria laid out by the Internal Revenue code. Non-qualified retirement plans are far more flexible, however, they do not meet the requirements mentioned, so they do not receive the same tax benefits.

There are a variety of other plans that individuals can take a look at before deciding on which to go with. Make sure you conduct your own research and remember that this is your future you’re dealing with.