- Date : 19/12/2022
- Read: 3 mins
Equity investment with sound financial planning builds wealth and beats inflation.
Sound financial planning and equity investment can help retirees beat inflation and create long-term wealth. A retiree must also keep funds aside in the short run, covering the next two to three years, before equity investment.
Higher returns with equity investments
Equity investment has fetched higher returns when compared to other assets. For example, gold's CAGR in the last decade has been around 5.43%. FD (fixed deposit) rates have been continuously falling and are currently at around 5%. RBIs House Price Index suggests that investment in real estate from June 2010 to June 2020 would have given you an 11.6% yearly return. However, from October 2012 to October 2022, it fell to less than 9%.
Interestingly, real estate's actual returns might be even lower if you consider housing loan interests. On the other hand, NIFTY's CAGR was 12% in the same period. It would be best if you also remembered that equities are highly liquid.
Equity Returns Beat Inflation
The average human lifespan is increasing due to better standards of living and healthcare advancements. A retiree might live around 25-30 years after retirement. This is where a retirement plan comes in handy. The number of post-retirement years is even higher for a retiree who retires earlier. You might not be able to create wealth or even beat inflation by only investing in fixed-income or debt instruments. However, equity investment can help you reap the benefits of compounding and higher returns.
If a retiree invests Rs. 25 lacs in equity with a 15% CAGR at age 60, their investment can reach Rs. 1 crore by age 70. The retiree can even use a portion of their portfolio for expenditures like holidays or contingencies. The balance amount can continue for compounding further. We see many seniors around 70 going on holiday as the world is becoming more modern.
Use Your Experience
You will find retirees with sound knowledge and understanding of certain companies or sectors. This knowledge and experience can help make better decisions while investing. They also have a sounder understanding of long-term developments.
Earn Dividend Income with equity investments
Dividends are excellent for making money through an equity investment. You will sometimes find the dividend yield higher or even at par with fixed deposits or real estate. Retirees can find dividend aristocrats. Dividend aristocrats are businesses that have increased their dividends continuously in the last 25 years. A retiree must remember their investment horizon and risk tolerance while investing. Experts suggest that 20-25% of investment should be done in equities. A retiree can stretch this percentage to 50-55%, depending on their corpus and appetite. They must consider investing in less volatile stocks, such as large-cap stocks. These stocks generally have solid fundamentals and are not highly volatile. In a nutshell, a retiree can focus on large-cap dividend-paying stocks for the best results.
You must do your due diligence and not invest blindly. You must seek the necessary guidance if you need more knowledge. Retirees must always set aside at least two to three years' worth for living expenses in liquid instruments like fixed deposits or similar instruments. It can help in the form of an emergency corpus. A retiree must also have health insurance and can invest any surplus in systematic investment plans (SIPs).
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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.