By Hemant Rustagi
CEO, Wiseinvest Pvt. Ltd.
Retirement is an important goal for each of us, and hence it should be given its due in our investment process. Unfortunately, despite realizing the importance of this goal, many of us end up ignoring it either by compromising on returns or by not planning investments properly. Then some commit the mistake of withdrawing amounts during the accumulation stage itself. While at times, it may be necessary to do so, making it a habit can negatively affect one’s retired life.
If you are one of those who are in the process of planning for their retirement, you must keep the focus on this important goal at all times and show a willingness to build a portfolio suitable for the accumulation phase. Here are the basics of planning for your retirement:
Assess your asset allocation
Asset allocation is essential while investing to achieve different goals over varying time horizons, including retirement planning. Asset allocation helps you determine the level of risk and the potential to earn returns from your portfolio. Remember, investing haphazardly could either result in making your retirement portfolio too aggressive or too conservative. In the accumulation phase, the focus should be on investing in an asset class like equity that has the potential to beat inflation over time. Of course, the proportion holds the key from risk and reward point of view.
Make smart money moves
The smart money moves involve budgeting and looking beyond traditional investment instruments like FDs and small saving schemes to be able to accumulate more and earn a positive real rate of return, that is, gross returns minus taxes and inflation. While there are attendant risks of investing in market-linked products offered by mutual funds, you can mitigate them by investing on a regular basis and remaining committed to your time horizon. Once you reach closer to your retirement age, it would be prudent to rebalance the portfolio in a phased manner to make it fit for income generation coupled with growth to stay ahead of inflation even after retirement.
Physical vs financial assets
Some of the critical factors to ensure investment success are liquidity, the tax efficiency of returns and diversification. Therefore, the strategy of investing heavily in real estate to earn rental income after retirement can backfire as it doesn’t provide most of these. Also, the rental yields are usually very low and that may leave a gap in what you would have and what you may need to cover your post-retirement expenses.
It is a proven fact that financial assets if chosen well, can do better than real estate on all these counts. Considering that you may require varied amount of regular income at different stages of your post-retirement period, investing in financial assets through an efficient investment vehicle like mutual funds can be a much better option.
Mutual funds provide options that can help you generate regular income and also make money grow at a healthy rate. For example, Systematic Withdrawal Plan (SWP) allows you to generate regular income despite being invested in a market-linked product.
Focus on tax-efficient options
The tax efficiency of returns can make a huge difference to what you get to keep out of growth and income generated through your portfolio. Hence, you must endeavour to choose tax-efficient investment options while investing for an important goal like retirement planning. Mutual funds score over traditional investment options, both in terms of the capacity to generate returns as well as tax efficiency to help you earn higher post-tax returns.
