Retirement Planning is one of the more complicated investment goals and must be approached scientifically. It is important to have a process-driven approach that considers critical factors such as current & future lifestyle expenses, the impact of inflation during retirement, and increasing life expectancy. With the continuous increase in life expectancy in India, every individual must have a retirement plan in place.
Retirement is a long-term goal and can be divided primarily into 3 phases of achievement. Each phase needs a customised approach to balance risk, returns and capital preservation.
Pre-retirement or the accumulation stage
This is the accrual phase and the foundation of your retirement planning. This phase requires you to be aggressive and be willing to take that extra bit of informed risk. This is because we believe that individual risk should be assigned to the tenure of the goal one is investing for rather than the inherent behaviour of an investor.
During the accumulation phase, taking higher risks with maximum allocation to equity is crucial. To offset the risk in investing, adequate mitigation measures could be employed, like staggered investing (SIP or STP), long-term orientation and having the right kind of investing expectation, especially in the short term.
By investing for the long term in a disciplined manner, you are also allowing compounding to take place on your investments, which works wonders for your investment. Imagine investing just Rs 26,000 per month, and you can potentially create a retirement corpus of almost Rs. 11.50 crores in 30 years (assumed CAGR of 13%). A large enough corpus for retirement is not possible if you don’t stay invested for long and let compounding take effect.
Consolidation phase closer to Retirement:
As you approach your retirement goal, asset allocation comes into primary focus, a portfolio review should account for managing risk and liquidity. Closer to your retirement, it is advisable to have a detailed review of your retirement portfolio and focus on effective asset allocation. Risk reduction of the portfolio takes place at this stage, with enough liquidity being maintained to cover lifestyle expenses for at least the first three to five years of retirement.
However, it is important to understand with increasing life expectancy one would need to account for at least 20 years of post-retirement life. If you become too conservative at this stage, you risk early depletion of your retirement corpus.
Not accounting for inflation in your future cash flows can also be detrimental during your retirement years. What costs Rs. 100 today could cost Rs. 500 in the next 20 years. If your investments do not outpace the effect of inflation, your corpus could diminish faster than expected. Therefore, the process of de-risking and asset allocation must create portfolio stability while generating returns that exceed inflation.
Post-Retirement Phase
It is widely recommended to become conservative in the post-retirement phase, however, this strategy might expose you to depleting your corpus too early and does not augur well for creating an inflation-beating retirement portfolio. It is crucial to take informed risk and to maintain a significant allocation of equity.
The key is to remain disciplined towards asset allocation and to generate enough growth in your portfolio to outpace inflation. Once your retirement starts, you could start a systematic withdrawal plan (SWP), to generate monthly income. The Systematic Withdrawal Plan can be an integral part of your retirement plan, designed to ensure stable income generation while preserving the longevity of your retirement corpus.
Retirement planning is complex with exact calculations for each phase of your life. Taking help from an investment expert is critical. An expert ensures that your plan is customised to your unique retirement goals and helps you stay focused on your long-term success by helping you avoid any impulsive decisions driven by greed or fear.
-The author is the Co-Founder and CEO of FinEdge. Views expressed are personal.
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