For most individuals, financial planning for retirement is last on the priority list. Risks from volatile markets, fluctuating interest rates and increasing life expectancy mean that individuals have to invest in assets which give higher returns over a very long period of time.
As barely 10% of India’s working population has any form of social security, early retirement planning is important to maintain your current living standards. You must look at the risk profile and invest in products that help generate returns.
The latest Melbourne Mercer Global Pension Index (MMGPI) shows while India had the maximum improvement in global pension, with its index value going up from 40.3 in 2015 to 43.4 this year, the country still ranks quite low—25 among 27 pension systems globally.
Anil Lobo, India Business Leader-Retirement, Mercer, says that the new initiatives by the government in providing tax incentives under the National Pension System (NPS) both during accumulation stage and withdrawal at retirement are increasing its popularity among employees in the corporate sector. Also, Atal Pension Yojana, which was launched in 2015, has also contributed to increase in coverage for pension among workers in the unorganised sector.
Building a corpus
The corpus that you build for retirement should be enough to maintain your lifestyle and take care of medical emergencies. The major challenge is to make inflation-proof investment. So, building a retirement corpus must be an ongoing process with an appropriate asset allocation strategy that includes equities, debt, gold and real estate and even alternative investments like art.
After the accumulation period is over, planning the annuity income and regular cash flows is the next milestone. Even during the accumulation period, you must regularly review the portfolio and re-balance the asset allocation to take care of market volatility.
Re-balancing of portfolio ensures that investments do not over-emphasise on any particular asset category. Selling investments from over-weighted categories and using the money to invest in under-weighted categories will help reap profit and escape longevity risk.
Proper asset allocation
Asset allocation must be based on the current risk tolerance level and expected returns in the long run. Analysts advise that individuals invest in those financial products that they understand properly and are well aware about the risks, liquidity, returns and tax implications. The benefits of compounding work best over longer periods of time, so it is best to start saving early.
Any retirement portfolio should have two components: One that earns the minimum income to sustain a basic lifestyle through annuity and monthly income plans and, the other, which gains from the upside through select equity exposure. The thumb rule of proportion of equity investment is 100 minus your age.
Equity returns, either through direct investment in stocks or mutual funds, are ideal over the long term, and are higher than what is earned through typical retirement avenues like provident fund and bank fixed deposits. As you inch towards retirement age, gradually de-risk to debt instruments and lower the equity exposure.
Even post-retirement, you can consider investing partially in equity or balanced mutual funds (65% equity, rest debt), after analysing your risk tolerance. The need to earn higher returns must always be weighed against the risk you are willing to take and an appropriate balance must be struck before embarking on any option.
Ready for the future
-Benefits of compounding work best over longer periods of times, so start building your retirement corpus early
-Retirement corpus should be able to maintain one’s desired lifestyle and take care of medical emergencies
-Regularly review your asset portfolio and re-balance it as required
-After accumulation, planning annuity income and regular cash flows are the next two milestones
-Go for appropriate asset allocation strategy comprising equities, debt, gold and real estate and even art