3 Steps to set up your own pension fund

Is early retirement written in your financial planning report?

When you think about the people who run the government and the big pension plans, do you really want to count on your pension fund as your ultimate retirement savings plan? From the retirement systems of Alabama all the way to the pension fund of New Zealand, there are cracks in the system. Your future is at risk if you are counting on someone else to pay your monthly bills when you retire. And regardless of whether you plan to retire early or work until the average retirement age, you must develop your own retirement savings plan. Everyone can set up his own pension fund, but often the investments will contain more investment risk than your old passbook savings account had. Here’s what you need to know:


  1. Your retirement savings plan is something that you must finance now. If you start stuffing money every month into some financial asset, you will be able to build up your nest egg through compound interest. The trick is knowing which specific financial asset to use. That’s when you need to develop a proper plan that calculates the optimal financial allocation. “Financial allocation,” often referred to as “asset allocation,” is just a fancy term for a pie chart that shows what percent of your money should be in stocks, bonds, real estate, cash, and other financial asset classes. The financial planning process helps you to determine what is the most appropriate financial allocation for you by building financial strategies that respect both your tolerance for risk and your long-term financial needs. In other words, the ultimate financial planning report will show a list of your goals, will discuss your risk tolerance, and then will suggest a financial allocation so that you can then take the action steps required to create your own retirement savings plan. (You can learn more about financial allocation from this article, “Risk tolerance and the art of tactical asset allocation.”
  2. Decide if you want early retirement or to go for the average retirement age. One of the most critical decisions you will make in creating your own retirement savings plan is when you will start using it to pay your living expenses. If you retire early, you are striking your personal pension fund with a double-edged sword. That is, you not only stop adding to your pension fund, since you opted for early retirement, but you are beginning to withdraw money from it. On the other hand, maybe that’s not so bad. If you’ve saved enough money to go for early retirement, why keep working? Be sure to ask the question, though, in terms of liquid assets, how much to retire do you really need?
  3. Emotionally, can you take the investment risk that you need in order to build a big enough pension fund? After you have committed to finance now your retirement savings plan, and after you’ve considered whether to strive for early retirement or just go for the average retirement age, now you must make some actual investments. If you determine how much to retire you will need, you can then figure out if you need to be more aggressive (think stocks) or whether you can be more conservative (think high-quality bonds and bank deposits). How much to put in each is related to the financial allocation discussed above. But you need to get more specific. Let’s say you will lean on the more conservative side. What types of bonds should you buy? Premium bonds? Junk bonds. If you’re not sure of the difference between the types of bonds, check out this article called “Premium bonds are not the opposite of junk bonds.”


Plan your retirementCredit: Image: Ambro / FreeDigitalPhotos.net

As a financial planner, I look for ways for clients to achieve their long-term goals with portfolios that are as safe as possible. Unfortunately, there is risk in everything. But rather than try to find the next hot stock in order to make a million dollars, I’d rather set up a logical, responsible portfolio that will lead clients in the direction of long-term financial safety. You should do the same thing. Don’t try to find a shortcut to wealth. The odds are stacked against you. Instead, figure out your basic goals, whether early retirement speaks to you or whether you want an average retirement age. Develop a reasonable financial allocation so that you’re not too over-weighted in any one area. And then work with a money saving expert or some sort of financial planner on your whole financial planning process. It’s a process, not a one-time decision. But the most important thing to do is to make the decision to think of your finance now. Every day that you wait to start your financial review, you’re missing out on building your wealth.


Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.