Planning for retirement by saving up a huge lump sum? That’s not going to work anymore.

Many people view retirement as a time when they have a big nest egg in the bank account and just withdraw from it regularly as they enjoy their golden years. This narrative might have been valid in the past when jobs were secure, and salary increases were regular and significant.

However, today, the narrative is different. There is no more security of jobs, and wages have been stagnant, while inflation continues to creep up. Companies are no longer offering company pensions, and government assistance for the retired and elderly should no longer be taken as a given.

Rising living costs & longer life expectancy

Building a nest egg during your working years is no longer a valid strategy to ensure a comfortable retirement. Insurance costs and costs of living are increasing, and with better living and health standards, you can expect to live longer than the average life expectancy in your country. Plus it is great to be able to help your family, friends, and relatives when they are in a financial pinch during your retired years.

It is vital that you plan out your retirement well. What do you intend to do during that period? What are the estimated costs that you will incur for that time? Hire a financial planner to help you plan for retirement. Get them to recommend investment instruments and insurance that fits your profile and goals. Get some medical insurance as health costs continue to spiral up. It is critical to be pessimistic about the future especially when it comes to expenses so that you can plan well for your retirement and not get the shock of your life because your nest egg is severely depleted and you have no regular income coming in.

So what are the steps that you must take to ensure that you have savings plus consistent cash flow throughout your retirement and stretch it as much as possible? The idea is that you should have multiple streams of income to ensure a comfortable retirement.

Steps for retirement savings that keep on giving

Step 1: Automatic Savings

First is automatic savings. This means at least 10% of your income should be immediately kept in savings. This savings account should be untouchable. If you make it automatic, it becomes easier because you will not be tempted to spend it. So set up an auto-debit arrangement with your payroll account to ensure that you build up a solid nest of savings for your retirement.

After hitting a certain amount of savings geared as emergency funds (e.g., at least six months of your monthly expenses), it is time to move the other savings funds into higher yielding deposits such as certificates of deposits or long-term note receivables by banks. There is a lock-in period but you get higher yields at the end of it. The problem with ordinary savings is that inflation eats up its value.

Step 2: Invest in dividend yielding instruments

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The second step is to invest in mutual funds and stocks. Allocate at least 20% of your active income towards paper assets such as mutual funds and stocks. If you have time to study and choose the stocks to invest in, make sure they are fundamentally sound and have good dividend yields.

If you are into your 40s already, then reduce your position with equities and go to less risky paper assets like bonds and government bonds. This will give you steady cash flow throughout the life of the asset. The important thing is that you have several investments that can provide some regular stream of income through dividends as well as price appreciation which eventually you can sell some of your stocks for a profit during your golden years.

Step 3: Get insured

Once you have some savings stashed already which can serve as your emergency funds, it is time to get some insurance. You can opt for coverage that can provide you some decent cash flows during your retirement years. Look for insurance companies that are stable and have generous payouts after the payment period. Even better are those that have medical or hospital benefits that go alongside with it.

Look for insurance companies that have a good track record and excellent customer service. You do not want to get stressed when you are old and getting your payouts is tedious and troublesome.

Step 4: Make some money outside of your day job

The fourth step is to start a side business while you are still employed. This is important because the additional income stream from your side business can be used to grow the business so that eventually it can replace your daytime job income. Alternatively, if you love your work and it has a lot of other benefits, you can use the additional income from your side business to invest in stocks, bonds, and other instruments.

So take a step back and reflect. What are your strengths and interests outside your current work that you think people will be willing to pay for? The critical thing is to test out your idea and see if you can generate some side income. Are you good in writing? Perhaps you can do some freelance writing on the side? Great with Photoshop? Maybe you can do design work on the weekends.

The idea is to build something on the side, and hopefully, it comes to the point that it can make more money than your current job. By then, it can become a full-fledged business, and you can hire employees or outsource the work while it rakes in cash while you enjoy your retirement years.

Finally, another excellent source of active retirement income for you is rental income. So while you are still able and employed, purchase as soon as possible a rental property. Choose a property that has a great location and plenty of amenities. Target millennials as they are not so keen in tying themselves up with a long-term mortgage. Once you get stability in your first rental property, get another one. Rinse and repeat. The idea is that by the time you retire, you will have several properties earning rental income for you. Plus, you will also benefit from the steady price appreciation that properties offer investors. You can then flip and sell it when you are retired to boost your nest egg or as startup capital for another business idea that you might have.

Reaping the benefits of your investments during retirement

Retirement should not be seen as a period in your life where you are stuck at home living off your pension or small nest egg. It should be an exciting time for you as you are free from the drudgery of work and are now reaping the benefits of all the investments you made while you were working.

Your focus therefore at the moment should be to enlarge your active income and turn them into passive income and multiple streams of income that can pay off in the long run.

(By Argee Abadines)

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