Retirement is another phase of life, which calls for careful preparation. PRINCESS ETUK writes about common errors to avoid when making retirement plans
Many people battle financial difficulties and hardship in their old age because of their mistakes while preparing for retirement. Retirement planning is crucial to enable your desired life when you are retired. Your plan can help you determine the necessary rate of return on your investments, the appropriate level of risk, and the amount of income you can safely withdraw from your portfolio.
By working with a financial advisor specialising in retirement income planning, you can ensure you have the right amount saved when you retire and that your assets are managed to protect you against unexpected events. So, you are not caught short during a market downturn.
One of the importance of retirement planning is improved health due to reduced stress. Money problems are a significant source of stress. According to the American Psychiatric Association, over 70 per cent of adults worry about money, which can adversely affect physical health.
Financial stress is linked to conditions, such as diabetes, heart disease, migraines, and poor sleep. Additionally, money worries can lead to anxiety and depression, depriving you of the peace of mind needed to enjoy your life. Taking steps to get your retirement planning on track today is crucial for your overall financial wellness, benefiting both your physical and emotional health.
Another importance of retirement planning is to enjoy a happier marriage. It is no surprise that money issues are a leading cause of divorce. Mismatched financial priorities, high levels of indebtedness, and the inability to work toward common financial goals can all cause marital strife. When you and your spouse are aligned on retirement planning, you eliminate major sources of discord in your marriage. By removing money from the retirement equation, you can focus on more exciting decisions, such as where you want to retire.
Hiring a financial advisor who can provide objective, non-emotional advice can greatly benefit your marriage. Maintaining a healthy relationship with your spouse is a compelling reason to prioritise retirement planning.
Starting late
Starting retirement planning too late is a common pitfall. Many mistakenly believe they have ample time to save, only to realise later they are short. To avoid this, begin planning and saving early. This grants more time to accumulate sufficient funds for retirement.
Underestimating expenses
Underestimating expenses is another frequent error. People often assume costs will decrease post-retirement, yet healthcare and inflation can escalate expenses. To counter this, meticulous budgeting and accounting for all potential costs are crucial when preparing for retirement.
Non-diversification of risk
Neglecting investment diversification is risky, especially for retirees reliant on savings. Focusing solely on one asset class may result in substantial losses during market downturns. To mitigate this risk, diversify investments across various assets like stocks, bonds, and real estate.
A common mistake in retirement is not seeking professional advice. Many individuals in Nigeria attempt to plan for retirement independently, foregoing consultation with financial professionals. While it’s possible to manage retirement planning alone, doing so can result in costly errors. A financial advisor can assist in crafting a personalised retirement plan aligned with your specific needs and objectives. Moreover, they offer valuable insights into investment strategies and tax planning.
Relying on government benefit
Also, relying too much on government benefits. In Nigeria, numerous individuals depend heavily on government benefits, such as the National Pension Scheme, to sustain them during retirement. However, these benefits may prove insufficient to cover all expenses, particularly with substantial healthcare costs or other financial responsibilities. To avoid this pitfall, it is important to save and invest, complementing government benefits with personal financial provisions.
Planning for retirement is crucial for securing a comfortable future. However, many Nigerians make common mistakes in this process, such as starting late, underestimating expenses, lacking investment diversification, not seeking professional guidance, and overly relying on government benefits.
By sidestepping these pitfalls and taking a proactive stance toward retirement planning, individuals can enhance their prospects of achieving financial goals and enjoying a secure retirement.
There is a straightforward method to achieve these goals if you are open to mastering how to leverage your money. It is known as compound interest, and it has the potential to significantly increase your wealth over time.
What is compound interest?
When interest comes to mind, it is often associated with debt. However, interest can be advantageous when it accrues on money you have saved and invested.
Compound interest refers to interest calculated not only on the initial principal but also on the accumulated interest from previous periods. This results in a cycle where interest earns “interest on interest,” causing wealth to grow exponentially. Compared to simple interest, which is calculated solely on the principal amount, compound interest accelerates the growth of deposits or loans.
Why early saving matters
The key factor that maximises the benefits of compound interest is time. The crucial point is that the timing of when you start saving outweighs the amount you save. An investment left untouched for several decades can accumulate a substantial sum, even without additional contributions.
Compound interest rewards early starters, making it beneficial to begin saving now. It is never too late—or too early—to start. Early in your career, it may seem challenging to balance financial priorities such as student loans, saving for a home, retirement, and more. Nevertheless, starting to save now can significantly strengthen your financial position, ensuring a stress-free retirement.
The power of compound interest also applies when saving for your child’s education. Starting early, even when they are in diapers, can make a substantial difference compared to starting when they begin their college search.
To build wealth effortlessly and harness the power of compound interest, starting early and maintaining consistency are crucial. As demonstrated in the example earlier, even a modest initial investment can grow significantly over time. By consistently saving and investing, you can build a substantial nest egg for your retirement.
Begin now and contribute what you can! Even small monthly contributions, ranging from N30,000 to N100,000, may not seem significant at first glance, but they accumulate over time.
Time is your greatest ally and the factor that amplifies the effectiveness of compound interest. The ideal moment to begin investing was yesterday, but the next best time is today. Whether you’ve just graduated from college or are nearing retirement, grasping and applying the principles of compounding can profoundly influence your financial security.
Starting early and saving now will yield returns in your future, enabling you to accumulate additional funds. This underscores the potency of compound interest and underscores the importance of initiating your savings journey promptly.
Emphasising the inevitability of retirement for all workers and the necessity of early preparation, the spokesperson of the Nigerian Union of Pensioners, Bunmi Ogunkonade, said, “Retirement is certain for every worker, just as death is certain. The earlier we know, the better,”
He urged workers to begin their retirement planning from the very first day of employment. “You don’t prepare for retirement a year or two before your retirement. You prepare from day one. Marry on time and train your children on time so that by the time you retire, you don’t have any other thing to do than only yourself,” he advised.
He also highlighted the importance of continuous self-improvement and education. “As you are training your children, train yourself more. If what you have is just a degree, go further.”
Ogunkonade stressed the importance of living within one’s means and saving consistently. “Another way to prepare for retirement is to learn to live within your means of time. And it is for you to have savings. If you have no savings, you’re not safe,” he explained.
He urged workers to save a portion of their salary regularly, even if the amount is modest. “No matter how much you are receiving as a salary, have a saving inside of it. You won’t know what you’re doing until after ten years. And when they say something is saving, it’s saving, it’s not for you to be thinking of it. Even if it’s N20,000 or N10,000 in a month. If you do it for three years, you will see how much that will amount to.”
He also advised that starting retirement planning early in one’s career is crucial. “So when somebody starts work at 25-30 years, as you start work, you start preparing for retirement,” Ogunkonade said.
However, he acknowledged that various life pressures, such as marriage and raising children, could complicate this planning.
“The world is not static, it keeps moving. For somebody to realise that they are going to retire, they start planning. But when you start, many things will contend with it: pleasure, pressure, how to marry, how to raise kids,” he explained.
Ogunkonade stated the mistake of living beyond one’s means, which hinders savings for retirement.
“Another challenge is that some people will know their salary and still want to live above their means. All these will not allow you to save for a pension because you realise that before you get the money, it is finished,” he remarked.
He warned that without proper savings, individuals over the age of 60 may struggle for survival and revert to their pre-employment financial status. “When somebody is 60 and above, the person begins to struggle for survival. You now go back to where you were, which your position was before you got the job.”
In conclusion, Ogunkonade emphasised the long-term benefits of consistent saving and investing. “By the time you save for 10 or 15 years, you will have enough money to make an investment and start a business,” he declared.
He encouraged workers to start preparing for retirement early to ensure financial stability in their later years.