For any retirement corpus, risks from volatile markets and fluctuating interest rates are the two most important factors that one must keep in mind during one’s working life. Rising life expectancy raises longevity risk, which means a retired person may outlive his investments and the money saved may not be enough to sustain the desired lifestyle after retirement.
Start investing early
Many people do not invest in the initial years and starting doing so after their responsibilities increase. Investing early in life can work wonders due to the law of compounding. Say, you were able to save Rs 5,000 a month at the age of 23, which you invested in an asset that provided 10% annual returns. In the second case, you did not save anything initially but started investing Rs 10,000 after the age of 33. When you are 50, the corpus in the two cases would grow to Rs 37.96 lakh and Rs 20.48 lakh, respectively. So, start saving and investing early in your life.
Make inflation-proof investments
The most important challenge is to make inflation-proof investments as rising prices will erode the value of money in the future. Most Indians prefer to invest in instruments like insurance and fixed deposits to build a retirement corpus. But these will not help much and one must have some equity investments, either through direct investment in stocks or mutual funds, for tax-free returns in the long run. One must choose an appropriate asset allocation strategy comprising equities, debt, gold and real estate. 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 through select equity exposure.
Invest in higher yielding instruments
One must save in higher yielding instruments from the beginning. For instance, if you invest Rs 10,000 every month for 15 years at a rate of interest of 7%, you would be able to build a corpus of Rs 31.69 lakh. The corpus would have grown to Rs 37.84 lakh if you had invested the same amount each month at 9% instead—a difference of over Rs 6 lakh.
Re-balance retirement portfolio
Re-balancing of portfolio will ensure that one’s 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 prevent longevity risk. 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.
De-risk before retirement
When you nearing retirement, gradually de-risk to debt instruments. Post-retirement, one should invest in balanced mutual funds. You can invest in bonds, fixed deposits and annuity products of insurance companies, which give a regular payout. Or, you can build a regular income from your second home in the form of rental income.
* Get the law of compounding to work by starting to invest early in life
* Re-balance your portfolio factoring in inflation, interest and macro risks
* Save in higher yielding instruments like equities from the beginning
* When you near retirement, gradually de-risk to debt instruments
* Even after retirement, invest partially in balanced mutual funds