How to Meet your Life's Key Financial Goals
Written on Saturday, June 13, 2015
By Sudipta Mitu
Retirement is said to be the longest weekend of Life. Due to various societal trends, people need to begin saving early for retirement so that they end up with an adequate corpus. With the joint family structure in India breaking down, people can no longer rely on their children or families to take care of them in their old age. This means that you need to save enough to take care of your living expenses for 25-30 years after you retire.
Things to Consider while Preparing Retirement Goal:
- How much and when to save: The earlier you begin, the more you will save. Several retirement calculators are available online that take into account your current age, current income and expenses , years left for retirement, and a variety of other parameters and tell you how much you need to save each month to reach your retirement goal.
- Inflationary Trends: Inflation poses the biggest challenge to retirement saving. Most people tend to have adequate money when they retire. But as the years go by, inflation takes a heavy toll. By the time they get into their seventies and eighties, their savings appear pitifully inadequate. Factor in an inflation rate of at least 6-8 percent when deciding how much you need to save.
- The right asset allocation: If you begin saving early, you have 25-30 years to go before you retire. Therefore, your retirement portfolio should be tilted heavily in favor of equities. As studies in the past have shown, equities have performed better than other asset classes over long term. Theoretically, you may have as much as 100 percent equity allocation in your retirement portfolio. However, take into account your risk appetite as well. If you do not sleep well when the equity markets are correcting, then you should go for a more conservative asset allocation: say, 75 per cent in equities, 20 per cent in debt, and 5 per cent in gold. If even this much equity allocation is too much for you, you may lower it further. However, remember that a very low equity allocation will make it difficult for you to gather an adequate corpus.
- Types of funds: Even within a large equity portfolio, eight funds should suffice. These should belong to different categories of market cap and investment style so as to create a diversified portfolio. Two of your funds (40 per cent of the equity portfolio) may be large-cap funds; two (30 per cent) may be mid- and small-cap funds; two (20 per cent) may be international funds; and finally, two may be value funds (10 per cent).
- Debt portfolio: Salaried employees would be making allocations to the Employee Provident Fund (EPF). The Public Provident Fund (PPF) is another instrument that may be used. Investors with some risk appetite may opt for debt mutual funds. Risk-averse investors should, however, stick to pure fixed-income instruments, since debt funds tend to give negative returns when interest rates are moving up.
Finally, whenever you are trying to create a portfolio to meet one of your life's goals, pay heed to your investment horizon. If the investment horizon is of 7 years or more, the portfolio should be primarily equity oriented. A 5-7 year long horizon calls for balanced funds, and for anything less than that, you should opt for a progressively more debt-heavy portfolio. Besides investment horizon, take into account your risk appetite and the level of liquidity offered by the financial instrument. Once you have decided on the portfolio, begin early and invest regularly, and there is no reason why you shouldn't be able to achieve even seemingly difficult goals. After all, a journey of a thousand miles begins with a single step.