Part 3: What Are the Key Elements of a Retirement Plan?

Part three: What Are the Key Elements of a Retirement Plan?

Learn about the essential steps involved in retirement planning.

Key steps to building a sound retirement plan.

Estimate your post retirement expenses.

Calculate the retirement corpus required.

Determine the annual savings needed to reach your goal.

Create three investments buckets.

Choose suitable investments for the buckets.

Monitor your portfolio periodically.

Protect your dependents with adequate insurance.

The first two articles in this retirement series addressed the importance of retirement planning and the advantages of starting early.
This article focuses on the fundamental elements of a strong retirement plan and outlines, step by step, the key considerations involved in developing a personalized retirement strategy.
The articles that follow will explore each step in greater detail and provide practical tools to support you throughout the planning process.

Here’s a clear, step by step roadmap:.

Estimate your retirement spending.

The first step in retirement planning is to figure out how much you are likely to spend each year after you retire.
This estimate becomes the foundation of your entire plan.
It may seem difficult, especially if retirement is still far away, but there are well established ways to arrive at a realistic number.
These methods, along with a helpful tool, are covered in the next article.

Calculate the retirement corpus you need.

Once you have an estimate of your annual expenses, the next step is to calculate the total amount you will need at the start of retirement.
You can do this by following the approach explained in the related article or by using our calculator to arrive at the required corpus more directly.

Determine your required annual savings.

With a target retirement corpus in place, work backward to determine how much you need to save each year to reach it.
The accompanying article and calculator provide guidance and support in arriving at an appropriate savings target.

Divide your savings into three investment buckets.

We recommend a simple and intuitive three bucket strategy for retirement savings.
Divide your investments into the following buckets:.

Wealth Building Bucket.

Income Protection Bucket.

Spending Bucket.

Each bucket serves a specific purpose in your retirement plan and holds different types of investments in varying proportions.
Do not worry if this sounds unfamiliar.
We have dedicated articles to explain the three bucket strategy in detail.

This approach has been rigorously tested using simulations.
The results suggest that it can perform better than traditional asset allocation strategies while also being simpler to manage and less time intensive.

Select the right investments.

The next step is to choose appropriate investments for each bucket.
Mutual funds and ETFs are often good options, though other investments can also be included.

Each bucket has a different objective and as result should hold different types of investments.
For example, the wealth building bucket should hold growth oriented assets, while the income protection bucket is meant for low risk or stable investments.
The spending bucket should contain the safest and most liquid assets.
A detailed discussion of suitable investment options is covered in a later article.

Monitor and rebalance your portfolio.

Every investment plan requires periodic review, to monitor the performance of your investments and to rebalance your portfolio if necessary.
The good news is that with the three bucket approach , frequent rebalancing of your portfolio is not necessary.
Occasional check ins are sufficient to keep your plan on track.

Protect your loved ones.

While not strictly a part of retirement planning, it is important to consider financial protection if you have dependents such as a spouse or children.
Securing adequate term insurance can help safeguard their financial future in the event of your untimely demise, while also giving you peace of mind.

The articles that follow take a deeper look at each of these seven steps.
We encourage you to read them all to build a clear and well rounded understanding of retirement planning, supported by simple, practical tools.

Our aim is to make personal finance easier to navigate and give you the knowledge you need to take control of your financial future and avoid costly mistakes or misleading advice.