By Albanus Muthoka
Retirement planning can seem complicated but at its core is consistency and a clear long-term vision. While many believe that constructing a robust retirement plan is a privilege reserved for the affluent, the reality is that several strategies employed by the well-to-do can be embraced by individuals with diverse income levels.
Let’s explore six distinctive approaches that both the wealthy and those with more modest means can leverage for a secure retirement.
Embracing Frugality
Wealthy people have mastered the habit of vigorous saving. They don’t necessarily equate their status with extravagant spending. The foundational principle is to live beneath one’s means. Affluent individuals tend to be aggressive savers and are always looking to increase the amount of assets they have invested — as a habit. This doesn’t imply refraining from expenditures; instead, it involves consistently spending less than one theoretically could.
Moving Beyond Conventional Saving Methods
While practising frugality aids in saving money, the wealthy take a step further by actively investing for growth. Instead of merely saving, they allocate these savings into growth investments. You are more likely to find their cash, for example, in a money market fund instead of a bank account whose rate of returns is lower.
In the first half of 2023, small cash savers made the least significant returns at 3.6 per cent as banks opted for wholesale lenders to support their lending, a report by the Business Daily indicated. The idea is consistent allocation to a diversified portfolio that grows steadily over time. The emphasis is on earning and growing, often utilizing methods advantageous for tax shielding.
Strategic Planning to Minimize Taxation
Investing for growth frequently involves a strategic consideration related to taxes. Wealthy individuals strive to minimize their tax liabilities when charting their retirement plans. The configuration of their investment portfolios is carefully crafted with tax efficiency in mind. For instance, if earning dividends in a taxable account triggers taxes annually, they might opt for holding non-dividend-paying stocks to defer taxes. If they are offered tax relief on pension contributions or an insurance policy, they take it!
Staying Disciplined
Surprisingly, there is no secret formula in wealth accumulation other than strictly adhering to core principles. Upholding discipline means living within one’s means, minimizing taxes, maintaining liquidity for emergencies, saving and investing as much discretionary income as feasible, and strategically allocating assets into growth-oriented categories. Discipline is paramount during market fluctuations, steering clear of panic-selling in downturns and avoiding over-investment during favourable market conditions.
Focusing on the Long-term
Retirement planning is a marathon, not a sprint. Wealthy individuals excel at maintaining a long-term perspective. They tend to be adept at staying on course and not losing sight of their lengthier-term goals.
Short-term market fluctuations are perceived as less significant in the overarching narrative. While market trends exhibit historical upward trajectories, focusing on the long term ensures retirement savings grow without continuous interference.
Balancing Liquidity
Maintaining liquidity is a pivotal facet of retirement planning. While this might not be as applicable for those with lower incomes, affluent individuals carefully consider their liquidity needs. Having sufficient liquidity guards against the need to sell illiquid assets at unfavourable prices due to unforeseen circumstances. This doesn’t mean everyone should invest in highly illiquid assets but underscores the importance of maintaining some level of liquidity based on individual financial pictures.
A secure retirement is not an exclusive privilege for the affluent. Most of these core principles can be followed by people of all income levels. The amounts earned, saved and invested might differ, but the core concepts often remain the same.
By embracing disciplined financial habits, making informed investment choices, and staying focused on long-term objectives, individuals across diverse income levels can lay the foundation for a financially stable and gratifying retirement.
Mr Albanus Muthoka is the Head of pensions Consulting at Enwealth Financial Services Ltd. Email: [email protected]
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