The Importance Of Understanding Leverage In Retirement Planning
By Martin Aranovitch
If you are approaching retirement age, or if you're at that stage in life where your main decisions seems to be driven by financial concerns and worries about your future, then it may be time for you to start exploring some retirement planning options.
Retirement planners and financial advisers often talk about the need to plan for one of the three main "exit strategies" or retirement goals you should be aiming for when your working days are over. These three options are:
- Financial Security
This can be defined as having just enough each month to cover your basic cost-of-living expenses. Sadly, however, this is the "exit strategy" that most people currently approaching the age of retirement hope to be able to reach. - Financial Comfort
If your goal is to retire comfortably, this means you plan to have a little more than enough to cover your cost-of-living expenses, plus have enough money to cover a luxury purchase, such as a new car, or an occasional holiday such as an overseas trip every couple of years. - Financial Freedom
A simple definition of financial freedom is when your income exceeds not only your cost-of-living expenses and some financial luxuries, but also the amount of money you need to be, do, and have the things you want to do in life. In other words, you are free to do what you want to do, go where you want to go and be who you want to be. Less than 0.5% of the human population retire at this level.
Most people do not believe that financial freedom as defined above is possible or realistically achievable for them, and so they don't even pursue it as an option. What generally tends to happen, in fact, is that most people aspire towards financial comfort, but fail to plan for retiring at that level, and so they barely make it to financial security, if they are lucky.
One of the main reasons why people work hard all their lives and then retire partially or completely broke is because they don't understand the concept of leverage.
Leverage is the ability to achieve more and more with less and less. There are several ways to create leverage. You can create leverage in your productivity, for example, if you're an employer or a business owner and you have staff that you can delegate the work and most of the responsibilities to.
On the other hand, if you are a highly skilled tradesperson or a professional specialist (e.g. a surgeon), you probably have no leverage in your job, trade or career, because more often than not, the only person with the knowledge and the skills to get the work done in your business is you and you don't see how you can delegate your work to others.
Another form of leverage is financial leverage. If you are a highly paid professional and you are required to trade all of your time for the money you earn, then the focus of your retirement plan strategy will most likely be to increase your financial leverage. In other words, by having money working for you, such as when you make smart investments that bring you positive returns.
If financial leverage is the form of leverage you are counting on to underpin your retirement planning strategies, then you either have to learn to become an astute investor and a great analyst of financial opportunities if you plan on making the investments yourself, or you should look to partner with someone who does possess these skills, where they do the work, you finance the enterprise and you both share in the r
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