Financial planning is important to lead an anxiety free life both before and after retirement. There are many experts and financial consultants who offer different kinds of advice about the strategies you should employ in order to plan for the future wisely. But a lot of them give differing and sometimes contradictory advice. The net result is a lot of confusion about how much to save, how much to spend and on what to spend. That is why it is important to assess such advice in light of your particular situation.
There are some simple rules and ratios that can help you identify limits for spending and saving. With these convenient indicators, you can develop an effective financial planning strategy that will enable you to build the right amount of savings, and acquire the right assets to cover your needs pre and post retirement.
Rules and ratios aside, your age matters a lot in decisions such as how much to save, and where to save or spend. For youngsters just embarking on their career, the time available to build a nest egg is considerable. They have many years ahead to earn, so their ability to absorb losses or financial setbacks is higher. High risk, high return investments are a good option for them because they can recoup from losses, if any, before retirement.
But for someone nearing retirement, a subdued risk appetite is advisable because he or she can not afford to make huge losses on their investments. There is very limited time for such a person to earn and build savings. The focus should primarily be on safeguarding the savings.
A most commonly used formula to determine how much you will need post retirement says that you should aim at saving 12 times of your present annual income. Experts also say that post retirement you can sustain a decent lifestyle at about 80% of your current income.
Another commonly accepted rule to smart financial planning is to spend no more than 30% of your income on housing. You can follow this ratio to ensure that your do not excessively spend on your home and have enough for other critical expenses.
There are widely different views on the right income to savings ratio. Some experts advise saving 10% of your income on a continuous basis. While this may work well enough for youngsters at the beginning of their career, older people who are nearing retirement will have to do better. The percentage you need to save will also depend on many personal factors like your post retirement lifestyle, your health and earning capacity beyond retirement, amongst other things.