Things to Consider while Preparing for Your Retirement Goal
Written on Saturday, October 27, 2018
By Team Bajaj Capital
Retirement planning might be a distant goal for many of us, especially those in their 30s because at this phase of life, we are busy considering other financial goals like property buying, children's future education needs, wealth creation, etc. Retirement planning takes a back seat, perhaps because we believe there is still time for it or maybe we think that our EPF contribution will suffice our retirement corpus. However, we are wrong in thinking so; giving an early start takes off the load, making the goal of 'Retire Rich' a smooth sail.
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.
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 per cent when deciding how much you need to save.
Suppose, at present, you need Rs. 40K/month to pull of your expenses, then you need to understand that after 30 years, the value of Rs.40 K will increases to around Rs. 2 lac at the rate of 5-6% inflation. So you need to create a retirement corpus massive enough to provide you with more than Rs. 2 Lac per month for the rest of your life. Relying only on EPF won't be a wise bet and making a late start will create the burden of saving more in or order to accumulate that massive corpus. However, an early start and choosing the right investment technique will help you retire rich in a much easier way.
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 favour of equities. As studies in the past have shown, equities have performed better than other asset classes over the long term. Theoretically, you may have as much as 100 per cent 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.
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). Investors with some risk appetite may opt for debt mutual funds. Risk-averse investors should, however, stick to pure fixed-income instruments like bonds.
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 the 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.