How to Plan for Retirement

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While retiring rich and early is everyone's dream, only a handful are lucky enough. By developing a retirement plan and investing early in one's working life, retirement can be financially stress-free. A retirement goal should be based on three assumptions: The age at which one expects to retire; the lifestyle one hopes to support; and a longer lifespan than previous generations, given the increased lifespan of today's retirees. So it is very important to define a goal, make a plan and invest for the long run. This requires a focus on both saving and investing. Balancing personal risk tolerance with a longer investment horizon is essential to make informed asset allocation decisions for a retirement goal. At any risk level, diversification is key, as it can help to maximise returns for a given level of volatility.

Retirement investments
The foremost challenge is to make inflation-proof investments since rising prices will erode the value of money. When you are planning your retirement, you must factor in inflation. And to make the best of your investments and yet limit your risks, retirement planning must be a continuous process with an appropriate asset allocation strategy comprising equities, debt, gold, real estate and even alternative investments. Risks from volatile markets and fluctuating interest rates are the two most important dampeners for retirement corpus and, many a time, the corpus one wishes to have on retirement may not be achieved with the planned savings. The earlier you recognise this shortfall, the better it is, as it will help you to reach the goal more efficiently.

Save during working life
After the accumulation period ends with the completion of one's earning phase, chalking out the annuity income and regular cash flows is the next milestone. During the accumulation period, regularly review and re-balance portfolios to meet the needs of retired life. With some deft planning, it will not be difficult to plan and rejig investments which earn steady income. Most Indians prefer to invest in instruments like insurance and fixed deposits to build a retirement corpus.

Always invest a part of your savings in equity-related instruments for higher long-term returns. Equity investments, either through stocks or mutual funds, are ideal over the long term, and the returns are higher than what is earned through typical retirement avenues like provident fund and fixed deposits. When you near retirement, you can gradually de-risk to debt instruments. Even post-retirement, you can consider investing partially in equity or balanced mutual funds, after analysing your risk tolerance.

Understand cash flows
If you don't know what your annual expenses, debts and estimated taxes are going to be after retirement, it is impossible to figure out if you have accumulated enough assets to sustain your needs throughout retirement. Maintain an actual statement of expenses for the last few months before retirement to calculate average monthly expenses. You need to figure out how much you will need to withdraw in the first five years of retirement.

Then start to shift that money into more conservative investments to make sure that you will have that five-year runway. Ensure that your portfolio is not too aggressive as market fluctuation can wipe out significant part of your investments, especially if you need cash urgently. You need to invest some part of your money in capital growth asset class but it is important that you need to have adequate liquid cash to lead your new lifestyle. Your asset allocation should be such that it provides you a regular income.

Monitor and re-balance
An individual must monitor progress of the portfolio and revisit the plan at least once a year to factor in significant market moves or life changes. Modifying a plan according to circumstances will help build retirement wealth. With some deft planning, it won't be difficult to plan and rejig investments that earn steady income and counter inflation. One should invest in products that one understands. Re-balancing portfolios ensures that the investments do not over-emphasise on any particular asset category. Selling investments from over-weighted categories and using the money to invest fresh in under-weighted categories will help reap profit and escape longevity risk.

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