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By J Finnis You're young, active, and enjoying life to the full, so why think about financial retirement planning? But there are very good reasons to start planning for your retirement right now. More people are living longer; hence more pension funds will be needed. Plus many developed societies are experiencing falling birth rates, so there will be fewer working people to support you in retirement. The corollary - today's workers can't rely on the state or next generation to support them in old age. How pensions work On reaching retirement your accumulated pension fund is used to buy an annuity, this is an investment that pays a periodic sum for the life of the holder. A cash sum may also be withdrawn from the pension fund before annuity is purchased. Your annuity does not have to be bought from the company(ies) that managed your pension fund. Shop around for the best deal. There are various types of annuity. With a "flat rate" the amount of pension stays the same for the duration of the annuity (NB if there is inflation the actual value of pension falls). With an indexed annuity the pension rises with inflation (ie the pension maintains its buying power), however the initial rate of indexed annuity is lower than a "flat rate". Some annuities offer widow's benefits, ie a (possibly reduced) payment continues to a partner should the annuity holder pass away. Company Pension Schemes Where available these are generally a very good deal as the employer also contributes to your pension fund (possibly as much as - if not more than - the employee). There are 2 flavors: a) individuals builds a personal pension pot which is used to fund an annuity, b) final salary plan in which the actual pension based on employee's final salary & length of scheme membership (regardless of actual amount paid in). Company pensions are often index-linked to rise with inflation. The final salary plan is generally regarded as a superior deal but is now being phased out by many employers. Compounding Returns on pension funds are compounded (re-invested). If you save $100 a month with 5% added at each year end: after 20 years you have $41,663, after 40 years you have $152,208. Invest for twice as long, get 3.65x the funds. To put it another way, if you saved $328.50 a month at 5% pa return for 40 years you'd build a retirement fund of $500,000. But if you delayed, you'd have to save $1200 a month over 20 years to accumulate the same amount! The effect of compounding means the sooner you start the better. Tax breaks Many governments offer some form of (often quite generous) tax incentive for pension savings. However, this comes with conditions, eg investments must be held in officially designated pension funds, funds may not be withdrawn until fund holder reaches a certain age (the may be some exceptions, eg for sportspeople who retire early). Retirement Financial Planning as a Long-term Game The timespan concerned means you can afford to be adventurous, particularly in the early days, as short-term volatility will tend to cancel itself out in favor of long-term rewards. The stock market is a good core investment either through: a low cost market index tracker fund, or individual stocks and shares. If you choose the latter be sure to invest in a broad range of stocks, eg at least 12, across different industry sectors. Avoid managed funds, fund managers are deleterious to your wealth and on average, after fees, fail to beat the market as a whole (of course some managers do beat the market in some years - by judgment or luck! - the problem is it's impossible to tell in advance which ones they are). Diversification into real estate, overseas investment etc is advisable. Pension funds can also include art & other collectibles - fine if you have specialist knowledge, otherwise best avoided. Reverse Mortgages - Cashing in on your Biggest Asset For many people reaching retirement their largest asset is their home. Many older people move from (more expensive) larger houses to (cheaper) condominiums, thus releasing funds. Reverse mortgage schemes release capital on all or part of your home in return for an income for life. You are allowed to remain in your home as the scheme doesn't get its share until you pass away. However, reverse mortgages will have a negative impact on your dependants' inheritance.