Retirement: The time to plan and invest is now

Updated: Aug 13 2014, 07:22am hrs
Retirement planning is not much different from any other type of financial planning. Only thing is that, in this case, you would need a regular cash flow for decades. As we do not have any state social security cover, a majority of the population would need to take care of post-retirement needs through own savings and investments.

The decade since 2000 has been a roller coaster. Between FY04 and FY08, the Indian economy grew at an average of 8.7% and the stock market touched new highs. Then, the economic downturn between 2008 and 2013 and lower stock-market returns made investors fret. Now, with signs of green shoots emerging in the wake of a stable government at the Centre, the markets are on a roll again.

In this backdrop, how do we plan for retirement Let us look at various life-cycle stages of accumulating funds and design retirement plans accordingly.

The beginning

Planning for retirement should start right from the time you get into your first job. While the benefit of compounding can create wonders for your portfolio, many do not follow this simple strategy. Irrespective of your needs and expenses, the first thing to do is to pay oneself. Set aside at least 10% of your net monthly take-home salary for investment. Say, you decided to invest R1,000 a month, anticipating an annualised rate of return of 12%. If you continue to invest the same amount for the next 30 years, then the total corpus accumulated will be R30.83 lakh while the capital contribution will be only R3.60 lakh. That is the power of compounding.

But if you delay the process by, say, five years, the total corpus accumulated after 25 years will be R17 lakh with a capital contribution of R3 lakh. The additional investment of R60,000 over a five-year period would make you richer by R3.83 lakh.

The middle age

While at this stage, one's family responsibilities grow, the quantum of savings should also increase. Do take a look at the allocation of funds to various asset classes as you may have to plan for buying a house, education of children and savings for retirement. Do remember, the middle-age is the period for income generation and you should continue to invest for all long-term goals.

The sunset period

Five years before retirement is the period when a majority of potential retirees want to take stock of the retirement corpus. Discussions are centered on the corpus and the need to grow it at maximum return. Never chase returns during this period. You must ring-fence your corpus effectively and revisit your expenses and income-generation avenues, without compromising on capital protection.

Asset allocation for retirement corpus

Theories abound on asset allocation being a function of your risk profile. However, if the investing period is 20-30 years, allocating 75-100% of the retirement corpus to equity over the investing period should deliver double-digit returns. If you have missed the bus during the early period of your career, the equity allocation should be 50-75%. Redefine the meaning of risk and never confuse volatility with risk. During the sunset period, start moving the retirement corpus to debt funds, so that the volatility is reduced. Bring down equity allocation to 10-20% of the total corpus. Equity provides the alpha to your portfolio and one must never ignore it.

Remember the power of compounding. The time to plan and invest is now.

The writer is founder and managing partner, Zeus WealthWays LLP