Start early. Waiting till you are only a few years away from retirement may not give you the time necessary to accumulate the funds you will need. The power of compounding plays an important role in building the corpus.
Adopt a long-term approach. As retirement is a long-term goal, the approach can’t be short-term. Building a retirement corpus necessitates long-term commitment, discipline and perseverance.
Get a fix on the amount. The first step is to actually know how much you will need to sustain your current lifestyle. Account for dependents and the impact of inflation when determining the retirement corpus. Your current investments help determine your financial readiness. Take into account your Employees’ Provident Fund corpus, Public Provident Fund and other traditional investments. Knowing your financial requirements and readying for them is an ideal starting point.
Diversify. Don’t put all your eggs in one basket. The greater the return expected from an investment, the higher is the risk associated. So, choose the right mix of assets (equity, debt, money market, gold etc.) so as to optimise the risk-reward equation. Research has proved that over 90% of variability of returns is determined by asset allocation and not by individual security selection. Besides, diversification provides you with adequate liquidity for your goals. The ideal asset allocation is achieved by choosing assets based on one’s risk appetite and investment horizon.
Invest systematically. Systematic investing has several advantages over lumpsum investing. It makes your investing approach disciplined and gives you the benefit of rupee cost-averaging, an effective mechanism that helps eliminate the need to time the market. When a fixed sum of money is invested regularly, over time it averages out the costs.
Create a contingency fund. This is a must. Create an emergency fund to the tune of six months’ household expenses. Ensure the fund comprises liquid assets.
Insure. Many of us think buying a life cover is enough. While having adequate life insurance is critical during one’s working years, it is equally important to have adequate coverage for health and critical illness.
Review & rebalance. Review your savings and investments periodically to make sure you are on track. This will allow you to make necessary and timely adjustments. Also, there could be changes in your plans owing to certain life events. Those changes have to be accounted for in your financial plan.
Seek expert advice. Retirement planning is a comprehensive exercise that requires the expertise to analyse personal finances, determine suitable asset allocation and choosing right investment and insurance products from an array of options.
Be disciplined. For the retirement plan to be successful, one must stay disciplined throughout the course of investment and follow the above steps diligently.
* The writer is business head, Principal Retirement Advisors