A happy and stress-free retirement is the ultimate sign of a successful investment strategy. While a working individual can meet financial expenses and manage emergencies by simply earning more, a retired individual can have a normal life after retirement solely through smart retirement planning. Your retirement strategy must consider the inflation, negative impact of allocation, the possibility of losses and other contingencies, and that you cannot allocate your entire income towards retirement planning.
A very important aspect of sensible planning for retirement is smart asset allocation. Asset allocation refers to the process of apportioning limited funds to different asset classes so as to create an adequate corpus for your retired life. The money that you have in your hand is merely an instrument to generate wealth. You have multiple options at your disposal—gold, fixed deposits, real estate, mutual funds, equity markets, and so on.
The simplest way to understand the linkage between asset allocation and retirement planning would be with an example. Consider the case of Mr. X and Mr. Y. Both start retirement planning at the age of 30 years with an investment timeframe of 30 years.
The case of Mr. X
Mr. X prepares a portfolio of assets consisting of SIPs, real estate, gold jewelry, annuity policies, and equity investments.
He begins by setting up SIP investments the moment he gets his first salary. He uses his annual bonus to purchase retirement plans. He buys a bigger home at the age of 35 and plans to repay the home loan by the age of 50 years. At the age of 40 years, he starts supplementing his mutual fund investments with direct equity market investments.
At 50, he decides to shift to debt funds offering lower returns with lower risk of losses. At 55, he decides to buy a smaller house for his retired life and creates fixed deposits from the excess cash from the sale of his first home.
The case of Mr. Y
Mr. Y begins by investing his monthly savings and annual bonuses in aggressive equity market investments. This high-risk high-return strategy is moderately successful and he withdraws the capital at the age of 40 years to purchase real estate.
At the age of 50 years, he decides to sell the home and invest the proceeds into an annuity plan. At 55 years, he is forced to consider high-risk equity investments to try and generate funds for buying a home for leading his retired life.
Both Mr. X and Mr. Y have relied on similar asset classes to plan for their retirement. The reason why Mr. X is in a more comfortable position is simple—better asset allocation.
Smart asset allocation for retirement planning
While it is impossible to come up with a universal formula for retirement planning, asset allocation must be done keeping the following factors in mind:
The secret to sensible asset allocation is to combine prudence with flexibility. An ultra-safe approach where you invest only in gilt securities won’t work unless you inherit a huge fortune. An aggressive and high-risk strategy may cause a five-year recession to leave you penniless in your old age.
Retirement planning is not a zero-sum game where one is either a winner or a loser. Mr. Y can still end up with a comfortable retirement if his high-risk strategy pays off. However, there is no denying that Mr. X is in a much-better position to enjoy a happy and comfortable retired life.
So who would you want to be?
"Be the CEO of your life"- Robin S. Sharma -
QUOTE OF THE DAY
Aegon conducted a series of surveys across 15 countries and discovered that Indians are most prepared and confident of living a comfortable lifestyle after retirement.
You may be a couple of years or decades away from your retirement, but it's imperative to plan and save for retirement, much in advance. Planning for retirement may seem an arduous task, but if done properly, will make your retirement stress-free and enjoyable!
National Pension System (NPS) is a voluntary retirement plan designed to enable systematic savings during the subscriber’s working life. This aim of NPS is to provide sustainable retirement income to every citizen of India who subscribes to NPS.