Page 167 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Introduction

Retirement is one of the most important life events many of us will ever experience. From both
a personal and financial perspective, realizing a comfortable retirement is an incredibly extensive
process that takes sensible planning and years of persistence. Even once it is reached, managing
your retirement is an ongoing responsibility that carries well into one’s golden years.
While all of us would like to retire comfortably, the complexity and time required in building
a successful retirement plan can make the whole process seem nothing short of daunting.
However, it can often be done with fewer headaches (and financial pain) than you might
think – all it takes is a little homework, an attainable savings and investment plan, and a long-
term commitment.

9.1 Meaning of Retirement Planning

Retirement planning, in a financial context, refers to the allocation of finances for retirement.
This normally means the setting aside of money or other assets to obtain a steady income at
retirement. The goal of retirement planning is to achieve financial independence, so that the
need to be gainfully employed is optional rather than a necessity.

The process of retirement planning aims to:
Assess readiness-to-retire given a desired retirement age and lifestyle, i.e. whether one
has enough money to retire; and

Identify actions to improve readiness-to-retire.

9.2 Why Plan for Retirement

Before we begin discussing how to plan a successful retirement, we need to understand why we
need to take our retirement into our own hands in the first place. This may seem like a trivial
question, but you might be surprised to learn that the key components of retirement planning
run contrary to popular belief about the best way to save for the future. Further, proper
implementation of those key components is essential in guaranteeing a financially secure
retirement. This involves looking at each possible source of retirement income.

9.2.1 Uncertainty of Social Security and Pension Benefits

First off, we need to be up front about the prospects of government-sponsored retirement -
They’re not very good. As we all know, the developing world’s populations are continuing to
age, with fewer and fewer working-age people remaining to contribute to social security systems.
Private pension plans aren’t immune to shortcomings either. Corporate collapses, such as the
high-profile bankruptcy of Enron at the turn of the century, can result in your employer-sponsored
stock holdings being wiped out in the blink of an eye.
Defined-benefit pension plans, which are supposed to guarantee participants a specified monthly
pension for the duration of their retirement years, actually do fail every now and again, sometimes
requiring increased contributions from plan sponsors, benefit reductions, or both, in order to
keep operating.
In addition, many employers who used to offer defined-benefit plans are now shifting to defined-
contribution plans because of the increased liability and expenses that are associated with defined-
benefit plans, thus increasing the uncertainty of a financially secure retirement for many.

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