Here are some important factors that one must consider while planning for one's retirement portfolio.
Life is unpredictable and death is never broached as a topic, but if a choice is to be made, of all types of death, people would prefer the one with older age! Hence inadvertently one must plan for proceedings until then, to be safe and comfortable. This process is known as planning for a retirement portfolio.
Some important factors that one must consider while planning for the retirement portfolio are:
Use present value versus future value
Future is uncertain and hence I do not recommend calculations based on the future value. Future value includes the steady increase in requirements given inflationary pressures and a higher increase in corpus value over time given real returns over inflation. By using present value, the individual is building a small shield given that the most asset classes over larger periods of time produce above purchasing power basket numbers. Let stable contributions over a period be your enlarging factor and let compounding be an unexplored factor.
Quantify a modest expectation
Keeping in mind the expectations for a lifestyle post-retirement, an individual must quantify the requirements. While quantifying, there are several assumptions to be made such as the mortality age, sustenance expenses, medical expenses and others. Being realistic is very critical in this stage or else, one would unnecessarily burden the present or even take aggressive portfolio calls which do not commensurate with the age.
Use a portfolio approach for corpus
Various asset classes in general can individually not do well for an extended period, but various asset classes cannot collectively do worse for an extended period. Hence, from a long-term perspective, the planning should be on the portfolio front. It would be very un-Indian to look at correlations of various assets and look at portfolio volatility with varied asset combinations. A simple approach is to not keep all eggs in a single basket and have asset class caps (example: equity at 50%) so that unintentionally an individual still produces a well-diversified portfolio.
Be prepared to be flexible in cash flow allotment or in decision making
Most bookkeepers of going concerns know long before whether things are working or not. Jump to default is an indication of the information asymmetry. For individuals alike they know long before that the going is good or not. Likewise, they need to adjust their saving functions or else look to be open to unconventional measures such as reverse mortgage. Don’t wait for a prolonged period to make amendments to the approach.
Planning is ongoing until retirement
Budgets can run surplus or deficits and through the journey adjustments need to be made to the planning process. An encouraging aspect of the retirement corpus planning is that it is long run (hopefully). The power of compounding is best seen over time since the greed for higher return is more left to desire rather than certainty. Depending on the course and having fixed goals or objectives planning for retirement becomes an ongoing process to be reviewed periodically in every 3 to 5 years. Planning is not a mark on the stone, but rather a stroke through the water to propel further.
(By Shreekant Daga, Associate Director, CAIA Association)