The Roadmap to Retirement – Your 2nd Innings!!

Retirement is like tomorrow’s sun. It will happen – whether you like it or not. It is as certain as any other fact of life. You, therefore, must be ready for it: mentally, physically and of course financially. In fact, there is a strong case for you to start preparing now, right now. So whether you are in the age group of 25 or 50: retirement planning is equally important to each one of you.

Retirement planning is a means and an end.

Means: because it shows you how to open the door to freedom and exhilaration.

End: because it propels you towards what you consider are the cherished goals in life.

It creates the bedrock on which your choices stand today. These choices can stem from your normal everyday activities as well as your ambitions and objectives.

The one thing that’s guaranteed to GO UP is the cost of living. Services that you need will be more expensive. Medical costs will soar. Hospitalization will cost the earth. Food prices will spiral. You will have to live with all that and more. More? Yes, remember, with better health facilities (courtesy, advances made by medical science) you will probably live longer than what may be expected.

Let’s take an example here:

Say a pack of toothpaste now cost you Rs.50/- and your family uses a pack a month – totaling Rs.600/- a year. Now if toothpaste price inflates at 10% per annum and if your family wishes to maintain their current lifestyle and use toothpaste 30, 40 and 50 years hence – the respective cost would come to Rs.10000/-, Rs.27000/- and Rs.71000/- p.a. (sounds weird – but it’s true). Now if this happens when you are still working, it is still ok – but if the rise happens when you are no longer working will have serious repercussions. And remember this will happen not only to your toothpaste but to each commodity, you are using today. How to manage then is a challenge: we need to face now.

Retirement plans can be defined as the manner in which an individual plans for the years during which he ceases to do routine work that had in the past generated regular income.

Putting a number to your goal

An individual, during his pre-retirement years, will have to set clear goals (as early as possible), which must be translated into numbers. What are these numbers? These numbers mainly from the amount of money needed to cover expenses, keeping in view possibilities like escalating prices (inflation) and taxes.

The corpus that you build for your retirement depends on 2 broad factors:

o    the choices you make, and

o    the behavior of the financial markets.

We have no control over the behavior of the financial markets, so let’s leave that one aside.

Consider the first. Can you imagine what your retirement life would be like if all the choices you made were absolutely perfect? If you didn’t make a single retirement planning mistake, if every time you invested, it was according to plan, in the right asset class, in the right instrument, in the right option and at the right time? Wouldn’t life be grand?

In the spirit of achieving that investing perfection, let’s educate ourselves on What We Need to Do.

Let’s get started.

Have a Retirement Plan

At Bajaj Allianz Life, we have seen our clients go through incredible growth phases – not growth of the financial markets, but phases of personal financial growth.

When I talk to some clients, the state of their investments ranges from the slightly unstructured to the completely messy. If you don’t know where your money is, you won’t know what it’s doing. Our clients at times come to us slightly confused, not having articulated their financial goals, and looking for financial help.

Remember, you are earning and investing now, so that you build up enough funds to cover all your expenses for your entire retired life, so give your retirement plan the attention and importance it deserves.

Diversify & Rebalance Your Assets

Don’t make the mistake of thinking that it’s all about equity / property.
You must have a proportion of your wealth in different asset classes such as debt and gold.

There’s a thumb rule you can follow to know how much equity you should have, and it’s got nothing to do with your age.

It’s got everything to do with your investment time horizon.

If your retirement fund goal is less than 3 years away, you need to be in debt / fixed income products. This is not the time for equity.

If your retirement goal is between 3 and 5 years away, you can have part equity exposure, up to 45%, with 15% in gold, and 40% in debt / fixed income.

If your retirement goal is more than 5 to 7 years away, you can have anywhere between 45% to 60% in equity, 15% in gold and the rest in debt.

If your retirement goal is 7-10 years away or more, you can opt for 75% in equity, 15% in gold and 10% in debt.

If you follow this, you will never face the panic that equity investors faced when the market crashed in 2008.

That’s not all. You also need to keep track of how and when to rebalance your funds.

Remember that as your retirement goal time horizon changes, your asset allocation must change. In your Retirement Plan, your investments need to be rebalanced to reflect the right asset allocation for the goal’s reducing time horizon.

[Source: http://lifeinsights.bajajallianz.com/roadmap-retirement-2nd-innings/]