Early start must for retirement planning to avoid playing catch up later

Retirement is one financial goal that is largely overlooked by most of us. With increasing life expectancy, retirement years could turn stressful if one does not plan in advance. Hence, put aside 10% of your take home salary in a retirement basket, as soon as you start working.

Invest in instruments where the compounding takes place more frequently and readjust your risk profile gradually to increase returns. Asset allocation will largely depend on the level of risk you are comfortable with and your age. It also depends on other factors, such as how many dependants you have. If you like to invest only in debt instruments, you will have to invest a larger chunk of your income to compensate for the relatively low return.

Arriving at your retirement needs

Consider your monthly expenses at current costs. Assuming an inflation rate of about 6 per cent, inflate the expenses for the number of years left for you to retire. This will help you arrive at the amount of monthly expenses you would need to survive through your retirement years. Then, estimate how much you need to start saving till your retirement age to accumulate a corpus that could provide you with the inflated monthly amount.

Change asset allocation according to your age

If you are starting out young, your funds’ portfolio should be heavy on equity funds - around 80 per cent. Aggressive investors (equities oriented) can invest 30 per cent of their funds portfolio in mid-cap and small-cap funds, as these are more risky.

In your ‘30s, lighten up your equity funds holding marginally - the aggressive investor from 80% to 70% and the conservative investor (debt/ fixed income oriented) from 60 per cent to 40 per cent. In your ‘40s, the best bet for the aggressive investor is a perfectly balanced exposure to both debt and equity. The conservative investor may choose a 10-20 per cent higher debt allocation. In the ‘50s, migrate your money from volatile equity to safer debt, to ensure the safety of your capital.

Use multiple debt instruments for regular income

For your regular income requirements, use a combination of pure debt-based products. Bank fixed deposits, Senior Citizens Savings Scheme, post office Monthly Income Scheme (MIS) and immediate annuities schemes should continue to form the bulk of your portfolio. While they do give constant income, their returns will not beat inflation. Besides, partially liquidating them during their tenure attractis a penalty. Hence, choose and renew existing fixed-income investments only after considering the tenures.

De-risk by shifting gradually to debt

Post-retirement, de-risk in all your stock market-linked investments, such as equity mutual funds, and shift from growth options to debt options. You can invest in balanced funds with a maximum exposure of 65 per cent in equities. Don't invest in corporate bonds unless they are high-rated papers and the issuer has an established track record. Avoid buying life insurance product unless you still have financial liabilities. Create a contingency fund to cater to emergency expenses such as medical needs and review it regularly.

FUTURE COMFORT

• Start investing for retirement early in your career
   
• Take inflation into accont while calculating the money needed post retirement
   
• Invest heavily in equities at a younger age and switch to debt gradually as you move closer to retirement
   
• Post-retirement avoid risky investment options, but maintain contingency fundt more in equities when younger; move to debt closer to retirement

The author is National Sales Director, Franklin Templeton Investments