In order to accumulate wealth for retirement, an individual must focus on both saving and long-term investing. First of all, one must define a goal and then make a plan to achieve the goal. An individual must set up and maintain an emergency reserve fund and save smartly and invest wisely. The retirement goal must be based on three factors — the age at which one expects to retire, the lifestyle one hopes to support and estimating the corpus needs given the increased longevity.
Also, balancing personal risk tolerance with the risk capacity associated with the longer investment horizon of retirement is very essential. Moreover, diversification of asset classes is key as it can help to maximise returns for a given level of volatility in the markets. To make the best of your investment and yet stay risk-averse, retirement planning must be a continuous process with an appropriate asset allocation strategy comprising of equities, debt, gold and real estate.
An individual must monitor progress of the portfolio and revisit the plan at least once a year to factor in significant market moves or life changes. Modifying a plan according to circumstances will help build retirement wealth. With some deft planning, it won’t be difficult to plan and rejig investments that earn steady income and counter inflation.
Most Indians prefer life to invest in instruments like insurance and fixed deposits to build a retirement corpus. About 60% use savings accounts to prepare for retirement, which constraints their ability to earn higher returns. Analysts say one’s post-retirement portfolio should be built on the basis of the current risk tolerance level. Since only 10% of India’s working population has any form of social security, early retirement planning is important to maintain one’s current living standards.
One must look at the risk profile and invest required amounts in products that help generate returns. Most importantly, one should invest in products that one understands. Re-balancing portfolios ensures that investments do not over-emphasise on any particular asset category. Selling investments from over-weighted categories and using the money to invest fresh in under-weighted categories will help reap profit and escape longevity risk.
Equity returns, either through direct investment in stocks or mutual funds, are ideal over the long term, and are higher than what is earned in typical retirement avenues like provident fund and fixed deposits. When you near retirement, you can gradually de-risk to debt instruments. Even post-retirement, you can consider investing partially in equity or balanced mutual funds, after analysing your risk tolerance. 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.
An individual can invest in bonds or fixed deposits, which will give a regular payout. Or, one can build a regular income from your second home in the form of rental income. Although it is important not to completely depend on rental income, you can plan for this, which will reduce your retirement corpus needs. Most importantly, never postpone your retirement investment plan and put an effective retirement plan at the early working stage.