Look Forward And Plan Backward: The Ultimate Key To Effective Retirement Planning

Have you planned for your retirement? In India, only around 25 per cent of people have a plan to save for retirement, according to the Reserve Bank of India’s National Centre for Financial Education(NCFE) Financial Literacy Survey. In the absence of adequate retirement corpus, people in their old age, typically depend on their children for financial support. That is why experts suggest planning for retirement from a young age as it allows one to benefit from compounding, provides better protection against inflation, and ensures a strong financial foundation by the time one reaches old age.

But how should one plan for retirement? Among the older generation, and particularly in the middle class, saving used to be the norm, but investment was not. Today, with more financial awareness and technological advancements, people are not just saving money, they are exploring various options to invest, too.

However, simply saving and investing for the long term, whether through mutual funds, fixed deposits, gold, or real estate, is not retirement planning. It is merely consistent saving without a clear goal. This kind of planning is an example of forward planning.

A research report, Relative Effects of Forward and Backward Planning on Goal Pursuit by Jooyoung Park, Fang Chi Lu, and William M. Hedgcock, in Psychological Science in 2017, highlights the role of planning. The study examines how planning steps in chronological order (forward planning) versus reverse chronological order (backward planning) influences individuals' motivation for and perception of goal pursuit.

In simple terms, forward planning is about looking at the next step from the current position, whereas backward planning involves working backward from the destination or the desired goal.

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The Power Of Backward Planning

Backward planning helps individuals stay on track, even when unexpected events disrupt their plans. It allows people to align their current financial situation with their future goals, making it easier to analyse whether those goals are achievable. More importantly, backward planning helps set a pace for progress and prevents distractions and derailing from the financial journey.

According to the study, the backward planning approach is especially useful for ‘complex’ issues. It holds in retirement planning as well. The psychological aspect plays its role. A person using forward planning might follow the mantra of ‘keep saving and investing’,  but if there is a disruption, such as a pandemic, the loss of a loved one, or some other unexpected financial crisis; suddenly the future may look bleak and all planning could fall apart.

This is where backward planning proves invaluable. It helps to keep on track and adjust steps and pace to reach where one wants to reach. Backward planning helps particularly when there is uncertainty.    

How Backward Planning Helps In Retirement Planning:

In a world where people have no certainty of income, and social security in old age are uncertain, planning for retirement is critical. While saving and investing are important, it is even more crucial to know: how much money would you need in retirement? What amenities and lifestyle preferences would you wish to have and what will be the income sources of income to meet the expenses? As they say, look ahead and plan backward, this is the key to effective retirement planning.

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