With people living longer and retiring earlier, it is a must to think of a plan to support oneself after retirement. Retirement planning in the financial perspective refers to the allocation of finances for retirement.
The objective of such kind of planning is to achieve financial independence, so that future employment does not become a necessity. Financial planning for retirement includes setting aside of money or other assets to obtain a steady income at retirement. One requires to not only plan ahead but to follow through with the plan as well. There are financial planners and advisers available to offer assistance in terms of developing retirement plans, where compensation is either fee-based or commissioned contingent on product sale. However, these days consumers can also adopt a DIY or do it yourself approach. Retirement web-tools in the form of simple calculator, mathematical model or decision support system have appeared with greater frequency. A web-based tool allows the client to fully plan, without human intervention.
Retirement finances incorporate an assorted range of subject areas or financial domains of client importance such as investments (stocks, bonds, mutual funds); real estate; debt; taxes; cash flow (income and expense) analysis; insurance; defined benefits (social security, traditional pensions). From an analytic perspective, each domain can be formally characterized and modeled using a different class representation, as defined by a domain's unique set of attributes and behaviors. Domain models require definition only at a level of abstraction necessary for decision analysis. The word planning refers to the future, therefore domains need to go beyond current state description and address uncertainty, volatility and altering dynamics. Together, these factors raise significant challenges to any current producer claim of model predictability or certainty.
The Monte Carlo method is considered to be the most common form of a mathematical model that is applied to predict long-term investment behavior for a client's retirement planning. It offers the utility to identify adequacy of client's investment to attain retirement readiness and to clarify strategic choices and actions. Contemporary retirement planning models are still not valid and are under criticism since the models purport to project a future that has yet to manifest itself. Contemporary models may only have proven validity retrospectively, whereas it is the indeterminate future that needs solution. A more moderate school believes that retirement planning methods must further evolve by adopting a more robust and integrated set of tools.
However, there are a few things that one needs to keep in mind. Firstly, retirement planning needs to be started early as the later one begins; the lesser are the chances of the savings to grow. Secondly, one needs to understand that company retirement benefits alone are not always enough. People commonly misunderstand how company retirement benefits work and what they offer. Thirdly, contrary to the common belief, the social security system is not a safety net for those who retire with no assets or income. Fourthly, Medicare is not enough to cover health care costs. Lastly, many live in the misconception that it costs less to live during retirement. In addition to increased health care costs, leisure and entertainment costs tend to increase sharply shortly after retirement. Financial pressures also sharply increase for those who have had late children. Therefore, one needs to assess the expected retirement expenses and include them in the planning projections. No one can guarantee financial independence following retirement. However, proper planning and commitment can make this dream turn into reality.
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