A Reliable Strategy to Ensure You Have Enough Money When You Retire
Sep 06, 2019

Author: Aditi Murkute

(Image source: freepik.com)

Just like every year, the entire family comes together at the ancestral home to celebrate Ganesh Chaturthi. When the extended family meet, the elders end up reminiscing about the old days.

My uncle spoke about the price of chocolate in the early '80s as compared to now. I listened carefully to what he had to say.

"During my childhood, a small candy would cost ½ a paisa and now one small chocolate costs Rs 10 minimum. How everything is becoming expensive!

But because of the investments, I did in my youth I could retire by the age of 60 and now can enjoy my peaceful life", he said

I asked, "What did you invest in?"

My uncle replied, "Most of the investments were done by my dad, to begin with, plus he was wealthy, so I didn't bother much. But since I was not a spendthrift, I managed to save and preserve it."

[Read: What Are The Myths Holding You Back From Retirement Planning?]

"What do you mean?", I probed further.

"My dad allocated a large portion of his wealth to me in his will and I created multiple FDs of longer duration, which I kept rolling over."

"But now this strategy would not work for my son due to low FD rates, escalating cost of things, and his excessive spending habits. However, he keeps saying he wants to retire early and rich like me", he responded.

[Read: You Too Can Retire Rich! Here's How...]

This was as an epiphany; he had grown up in an era where competition wasn't as gross, no fast-paced life and hassles. Besides bank FDs or gold investment, there were no other avenues of investment for a moderate-risk investor that could beat inflation.

So, in his case, the strategy of rolling over his FDs helped him create wealth aided by the power of compounding for long term.

I told him, "In current times however it is impossible to earn inflation-adjusted returns using his strategy if one wants to retire early, by age 60."

"Retirement gives us an opportunity to spend the golden years of life the way we want and with the same or better lifestyle that we enjoy today."

"But a blissful early retirement costs lots of money. I firmly believe, if your son wants to retire early and rich, he has to be serious and start retirement planning right away."

As you're probably aware, post-retirement life changes drastically, income stops but expenses continue. Ultimately one needs money so that expenses are taken care of. Unless one has determined the corpus needed to live a blissful retired life, it would be very difficult to achieve this.

To make sure one is prepared for all the changes, one must follow these essential prerequisites.

​Our discussion was interrupted by his son, my cousin, Soham, "Hey! What are you two talking about?"

I responded, "We were discussing your retirement."

Instantly he said, "Yes, I want to retire early like my dad, with plenty of wealth in the bank under my name. But it's difficult you know!'"

I countered, "It's not!"

"How is it possible?"

retirement plan is imperative if you want to lead a blissful life and it will help you:

  • Fund your daily expenditures of post retired life

  • Tackle inflation adeptly

  • To deal with medical emergencies

  • Deal with life's contingencies

  • Achieve financial freedom and be independent

Consider retirement as the most essential life goal, so the earlier you start thinking about this evident fact you will take necessary steps for it with prudent decisions. You will need to start planning and investing early onwards for it now when you are young. "as an early bird catches a bigger worm"

[Read: Why Starting Young to Plan Your Retirement Works!]

My uncle and Soham exclaimed in unison, "How should one go about retirement planning?"

Here's what I shared with them...

Chart out a comprehensive retirement plan that not only will help you accumulate a bigger corpus for your golden years, but one that will help you incorporate and achieve your other financial goals as well.

It is summarised by the following few steps:

  • Create a goal-based financial plan (short-term and long-term goals) and add a timeline to it including your time of retirement (early or late) 

  • Consider the time you have in hand (estimate the number of years) before you retire so you can estimate the amount required for retirement based on the inflation 

  • Assess your income source; draw up your net worth chart 

  • Consider your risk profile based on your age, the time before you retire, the source of income, and willingness to take the risk. 

  • Based on your risk profile, choose the appropriate optimum asset allocation strategy that is balanced and equally well diversified. 

  • Save and Invest more while you are still working.

  • Cut down expenses and continue investing diligently.

  • Periodically review your portfolio

But the true essence is having a sound investment approach (personalised asset allocation) knowing your own needs, fund availability, and being aware of the risk of each available investment avenue chosen.

Remember that each investment option available has a level of risk associated with it. So, assess your risk profile before investing.

Table 1: Investment options and attributes

Equity Fund Debt Fund Gold Fund
Return High Capital Appreciation & Dividend Income Low Capital Appreciation Medium Capital Appreciation
Risk High Moderate to Low Moderate
Liquidity High Medium to high Medium
Suitability For investors having a long-term investment horizon and a high-risk appetite For investors having a short to medium-term investment horizon and a moderate to low-risk appetite For investors having a medium to long term investment horizon and moderate risk appetite (5 to 10% asset allocation)
This table is for illustration purpose only.
(Source: PersonalFN Research)

"What type of funds should one invest in?"

By allocating your investments across various asset classes, you manage to minimize risk and possibly increase gains in the long run.

As mentioned earlier, investing like in bank FDs will not help you accumulate wealth, since the Reserve Bank of India (RBI) has reduced the policy rate by 110 basis points (bps). Consequently, banks, too, have reduced interest rates on Fixed Deposits (FDs). If inflation mellows down further, the rates are expected to drop lower.

And then there are government-backed schemes like pension plans, PPF, EPF, NSC, etc. along with the option to create bank Fixed deposits. Although the returns earned are fixed, these are unable to provide inflation-adjusted returns (known as real rate of returns).

[Read: How To Improve Your Return On Investments?]

Instead, consider Mutual funds, they  give you an opportunity to invest across asset classes and mitigate the risk with proper diversification to suit your risk profile. Here are two of the major ones:

  1. Equities  are extremely volatile in nature, as currently there is extreme turbulence in the markets. But they do provide better returns in the long run. Allocating some portion of your investments to equity funds can help in wealth accumulation, albeit at high risk. To mitigate the risk, you could add debt investments and gold to the portfolio.

    [Read: How To Ensure The Current Economic Downturn Does Not Impede Your Retirement Plan]

  2. Debt as an asset class is carries lower risk as compared to equity and provides one's portfolio stability with an emphasis on generating a regular income stream. Debt investment isn't risk-free, but the category of debt-oriented mutual funds can be of immense help because it diversifies the risk and provides regular income. But do it with eyes wide open.

"Can't I directly invest in solution-oriented retirement funds?"

Although the Securities and Exchange Board of India (SEBI) has allowed mutual fund houses to offer retirement plans as solution-oriented schemes. But retirement schemes must be offered as open-ended schemes with a lock-in period of five years or until retirement, whichever is earlier.

Hence, not all Retirement Funds are worth your hard-earned money because if the scheme underperforms, you will be unable to switch to another worthy scheme.

Thus investing in a diversified equity mutual funds when you are young with an investment time horizon of more than ten years before you hang up your 'work-boots', it is preferable to take on Systematic Investment Plans (SIPs), a mode of investing in mutual funds. This way you can deal with the market volatility better and equity performs well over a longer time frame.

[Read: Best SIPs To Invest in 2019]

And as you are nearing your golden years, it would be wise to shift to debt funds as your downside risk ability diminishes and you want to preserve capital. Plus, you can allocate some portion to PPF and EPF as well as they are potent avenues, but do not solely rely on them to grow your retirement corpus.

Table 2: Indicative Category wise Allocation for One's Retirement Portfolio

Age Group 25-35 35-45 45-55 55-60 Above 60
Category Very Aggressive Aggressive Moderate Conservative Very Conservative
Equity 90%-100% 75%-80% 60%-70% 40%-50% 20%-30%
Large Cap Funds 10%-15% 10%-15% 10%-15% 15%-20% 10%-15%
Midcap Funds 20%-25% 15%-20% -- -- --
Large & Midcap Funds 20%-25% 15%-20% 10%-15% -- --
Multi Cap Funds 15%-20% 15%-20% 10%-15% -- --
Value Style Funds 15%-20% 10%-15% 10%-15% 10%-15% 0%-10%
Aggressive Hybrid Fund -- -- 10%-15% 15%-20% 10%-15%
Debt 0%-5% 10%-15% 20%-30% 40%-50% 70%-80%
Dynamic Bond Funds 0%-5% 10%-15% 10%-15% 20%-25% 15%-20%
Short Duration / Corporate Bond Funds -- -- 10%-15% 20%-25% 25%-30%
Liquid / Ultra Short Duration Funds -- -- -- 0%-10% 20%-30%
Gold 0%-5% 5%-10% 5%-10% 5%-10% 0%-5%
Gold Funds 0%-5% 5%-10% 5%-10% 5%-10% 0%-5%
100.0% 100.0% 100.0% 100.0% 100.0%
This table is for illustration purpose only.
(Source: PersonalFN Research)

Finally, Soham and my uncle were elated about the new investment approach to retire rich early. They thanked me and we joined the rest of the family in the festive celebrations.

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