Why retirement must be planned when you are productive?

Finance & Accounting Apr 21, 2021
Irshad Wicaksono Ma'ruf, SE, MM, CFP

Not many people realize the importance of having a retirement plan at a productive age. One reason why, is because people think that retirement is still too far to think about now. Many people in productive age group are more interested in allocating their money to other things, such as taking vacations, paying mortgage, buying an apartment, buying a car, or follow the hype of speculative stocks or cryptocurrency.

When they enter the pre-retirement age, they tend to be surprised and confused because there is minimum to no preparation for retirement, so many of them still have to work or depend on their children for their livelihood. And thus, their children become part of the ‘sandwich generation’. The irony is, this cycle continues to rotate. ‘Sandwich generations’ are passed down from generation to next generation.

There are 5 reasons to plan for one’s retirement at a productive age:

1. Time goes on and so does your age

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You cannot 100% rely on other people to support you in your old age. You must be fully aware of this. If you keep putting off financial planning, time is running out. Now, as you get older, the opportunities you have to plan for your retirement will be shorter and harder.

2. The inflation rate is getting higher

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Increasing inflation is a fact that we cannot avoid. The earlier you plan for your retirement, the easier it will be to keep up or surpass the rising inflation rate.

3. Not dependent on children

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You must have heard the old advice that says ‘many children, many sustenance’. If you have lots of children, your burden of bearing your old age may be lighter. However, most parents today only have two children. You don't want your children to bear your living cost when you’re old and retired. Therefore, it is very important to become prospective parents who are independent in terms of finances in old age by having sufficient pension funds.

4. Global competition is getting tougher

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Many people forget the importance of retirement planning from a young age. As a result, when they get older, they decide to continue working to pursue their pension fund needs. It is undeniable that as people age and job opportunities become more limited, there are lots of high-quality young talents out there. If we are not able to compete, the worst possibility is that our position in the company or business can be replaced by someone else. In the end, we suffer because we don't have the opportunity to raise pension funds anymore.

5. Retirement plan is cheaper when you start early

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The hustle and bustle of the city often makes you neglect financial planning, including retirement planning. As a result, the plan only became a discourse that never materialized. In fact, the sooner you plan your retirement fund, the less money you have to pay each month when compared to your new retirement plan, for example, at the age of 40.

There are 3 important components of retirement planning: living cost, health insurance, and asset distribution (inheritance). These three components must be prepared when you are still in the productive age group. If you are an entrepreneur, adjust your business plan so that you can ensure that you have a successor once you retire. If you are an employee, invest while you still have a main source of income so you can enjoy the investment returns once you retire. An employee usually already has a pension program where he/she works.

Unfortunately, the pension fund may not be sufficient. Ideally, people should have funds large enough to be placed in risk-less investment instruments such as government bonds or deposits that can generate returns equivalent to the cost of living in retirement. While you are still in productive age group, start investing in investment products that can provide high returns, for example, mutual funds or stocks.

Entering retirement is also accompanied by lifestyle adjustments by reducing consumption and transportation costs. Lifestyle adjustments, especially consumption and housing, do not only look at the cost factor, but also health. To maintain health in retirement, you should still have regular activities so you don't get stressed and sickly. Social, religious or hobby are activities you need to keep your health intact. It is also mandatory to have health insurance, because when employees retire, their health insurance facilities usually stop.

How about the distribution of assets? Some assets will take a long time to disburse and will be quite costly. Life insurance can be the answer because the process is fast and tax free. That is the main function of life insurance, to financially support the needs of your immediate family, when other assets are still in the process of being disbursed. Therefore, life insurance is useful for protecting from risk and not for profit.

Again, other than the three important points in preparing for retirement, “time” is also a key factor. If you can manage all of them well, then your retirement will be prosperous, but if you don’t you can be sure that your retirement is won’t be as propsperous.

Irshad Wicaksono Ma'ruf, SE, MM, CFP - Trainer di Pasartrainer

Program-program perencanaan keuangan di www.pasartrainer.com


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