7 steps to plan your investments for retirement
For retirement planning, determining your retirement corpus amount is only half the work done. Any plan not backed by action can fall flat. So, you need to start investing for retirement once you have figured how much you need.
Here’s how you should work towards accumulating your retirement corpus:
Start investing early
Take advantage of the power of compounding to amplify your investments. If you need to save Rs 5 crores for retirement in 35 years, then you need to invest Rs 13,060 per month for 35 years (at 10% p.a.). If you delay this by another 5 years, you will need to invest Rs 21,926 per month for 30 years. And with a further 10 year delay you will need to set aside Rs 37,370 per month. Thus, you can see the benefit of starting early; the monthly burden is lessened, when you have more time in hand. Don’t wait till your late thirties or early forties to start planning for your retirement.
Do not play too safe
Higher return is usualy associated with higher investment risk. Our parents saved for their retirement by investing in safe products such as fixed deposits, EPF, PPF and traditional insurance plans which may not help you beat inflation when the returns are adjusted for tax.
Using the same example, when returns are 8% p.a. you need to invest Rs 21,652 per month for 35 years, whereas you invest Rs 13,060 when returns are 10% p.a. If you settle an instrument that is safer but gives you 8% instead of 10%, you need to invest one and a half times the amount.
Investment discipline is paramount
It is easy to compromise on a financial goal that is still many years away. You might feel tempted to make a down-payment for a new car from your retirement corpus, because you’ve got time for retirement. In fact retirement savings are the first to get compromised in case of a short term cash flow crisis.
It is essential to maintain investment discipline, set up SIPs and auto-debit instructions for investments in mutual funds, recurring deposits etc.
Diversify your assets
Although you need to invest in equity mutual funds, it does not mean you must invest exclusively in equity investments for retirement. Do not ignore other asset classes, having a 100% equity portfolio for retirement at the age of 58 is as or even more foolish than having a 100% debt portfolio, when you’re 25.
An equity heavy portfolio near retirement, when the equity markets are in the bear period can lead to a lifetime of financial misery. Diversification across asset classes is important; start with an equity heavy portfolio and shift to debt instruments as you move closer to retirement.
Review and rebalance your portfolio
Review your portfolio regularly to see how your investments are doing and use this opportunity to eliminate underperformers. If your portfolio has underperformed, you may need to increase the investment amount. A bull or a bear run can skew the asset allocation, so you must review and rebalance your retirement portfolio at regular intervals.
Based on your investment horizon and risk tolerance, you must keep 60% in equities and 40% in debt. If required, sell some equity investments to invest in debt products during a bull run and vice versa during a bear phase.
Don’t have irrational expectations
Don’t fool yourself! If you have 30 years to accumulate Rs 5 crores, you need to invest Rs 21,936 per month, at 10% p.a. and only Rs 2,140 per month at 20% p.a. But to expect 20% p.a. return for 35 years is a recipe for disaster
Purchase adequate insurance
You do not just need comfortable retirement for yourself but for your spouse too. Purchase adequate life cover to ensure comfortable retirement for your spouse. You should also purchase adequate health cover to avoid a dent in your retirement savings due to prolonged hospitalization or illness.
Additionally, also set up a medical emergency fund to cover medical expenses not covered under your health insurance plan. You can also maintain an emergency corpus of funds to tide over short term cash flow crisis.
Also, while you’re planning for your retirement, make sure your children play an active role to carve their own future. As, parents we would do anything to keep kids happy. However, don’t go overboard. If you don’t want to depend on your children during retirement, let them share some responsibility. For instance, if you fall short of their higher education corpus or the amount required is more than you expected, ask them to take a loan to cover the shortfall. Don’t sacrifice your retirement savings!