The corpus that you build for your retirement depends on 2 broad factors:
- the choices you make, and
- the behavior of the financial markets.
We have no control over the behavior of the financial markets, so lets leave that one aside.
Consider the first. Can you imagine what your retirement life would be like if all the choices you made were absolutely perfect? If you didn’t make a single retirement planning mistake, if every time you invested, it was according to plan, in the right asset class, in the right instrument, in the right option and at the right time?
Wouldn’t life be grand.
In the spirit of achieving that investing perfection, lets educate ourselves on What We Need To Do.
Let’s get started.
- Have a Plan
Let us say first off that we are a mutual fund research and financial planning company, so our views on the financial planning process are immediately positively biased.
This is because we’ve seen clients go through growth phases – not growth of the financial markets, but phases of personal growth. When clients come to us, the state of their investments ranges from the slightly unstructured to the completely messy. If you don’t know where your money is, you won’t know what it’s doing. Our clients come to us slightly confused, not having articulated their financial goals, and looking for financial help. They leave us with a new sense of empowerment and discipline, clarity on their financial life, and a solid plan that they can follow. So you see, the personal growth is immense.
If you don’t want to hire a planner, do it yourself. We have a lot of material on our website including calculators and tools that will help you. Just be sure to have a plan. Not just for retirement, but for all your life goals such as your child’s education and marriage, purchase of that second home you want to own, regular foreign vacations and whatever else you want and can safely afford.
- Diversify & Rebalance
Don’t make the mistake of thinking that it’s all about equity / property.
You must look at a certain proportion of your wealth in different asset classes such as debt and gold.
There’s a thumb rule you can follow to know how much equity you should have, and it’s got nothing to do with your age.
It’s got everything to do with your investment time horizon.
If you memorize this and follow it, you will never face the panic that equity investors faced when the market crashed thanks to Lehman Brothers in 2008. You must also remember that as your goal time horizon changes, your asset allocation must change. Rebalance your investments to reflect the right asset allocation for the goal’s time horizon.
- If you have a goal that’s less than 3 years away, you need to be in debt / fixed income products.
This is not the time for equity.
- If your goal is between 3 and 5 years away, you can have part equity exposure, up to 45%, with 15% in gold, and 40% in debt / fixed income.
- If your goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, with 15% in gold and the rest in debt.
- For a goal 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.
- Save Now, Spend Later
The more you invest today, the more (much more) you’ll have to spend when you’re 60.
The numbers are straightforward:
If you invest Rs. 10,000 per month for 10 years, you will build a corpus of Rs. 27.50 lakhs at a growth rate of 15% per annum. Increase this to Rs. 12,000 per month, for the same time period i.e. 10 years, and you’ll build a corpus of Rs. 33 lakhs. Increase this to Rs. 14,000 per month, and you’ve got Rs. 38.50 lakhs.
So get a grip on your spending, save more, invest more, and retire earlier and richer.
- Don’t spend more than you have to on the taxman
Paying taxes can sometimes leave you with a ‘what a waste of money’ feeling.
In order to avoid this feeling, and also to save and invest more money, go through the following little tips:
Our website has a number of articles on how to save tax using Section 80C and other deductions, go through them and see which ones you can use. Remember, a penny saved (in this case from the tax man) is a penny earned.
- Make the most of all your deductions.
- Save medical bills in a shoebox throughout the year and claim Rs. 15,000 worth of deductions.
- Buy medical insurance (for the medical insurance) and claim the deduction on the premium.
- Buy a small second apartment if you can by taking a home loan, and claim the benefit of principal and interest repayment.
- If you live in a rented apartment, see if you can restructure your salary to claim the maximum HRA possible.
- Invest in PPF and don’t withdraw from it until you retire.
Planning for your retirement is simple. Once you create your plan, you start investing, and you just go on investing through bull and bear markets. Select good mutual funds and other investment instruments, with a strong track record. Don’t try to time the market, don’t churn your portfolio.
Time is a valuable asset and you should make the most of it.