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How to Invest for retirement

A retirement portfolio sans equity could fall woefully short of your actual requirements

Short-term thinkers do not survive the grueling miles. It would do well to apply the same discipline when managing your retirement portfolio.

In India, equity is generally given the cold shoulder when it comes to retirement planning. However, pacing ones equity holdings intelligently across one’s lifespan is the key to maintaining a smart retirement portfolio. As you inch closer to retirement, you could reduce exposure to this asset class but it would not make sense to eliminate it completely.

We have one bit of advice for everyone who is building a retirement kitty. And that is that they must include equity in it or else it will never match up to the amount that they need. And even if they have retired, they must maintain some amount of equity exposure. Equity is the most preferred asset class simply because it offers the highest returns potential.

The problem with equity is perception. Investors feel that it is way too risky. But risk is associated with every investment product; it is just that it is apparent in some and not so apparent in others.

Don’t ignore equity
You have no idea how long your retirement will last. To be prepared for that inevitable stage, you need to invest aggressively in equity as long as you are earning. While you will spend less once you retire, costs will be higher and your disposable income will decrease due to inflation. If you want to outlive your money, you need your money to grow right now.
Avoid the urge to dump all your funds into ultra-conservative financial instruments simply because you are scared of losing your capital. Someone who is 25 years old will be much better off investing more in a good equity fund rather than a fixed return instrument where interest is taxed (though not in PPF).
If you have already retired, a basic thumb rule is that six months of monthly expenses are kept in a very liquid instrument; the amount that needs to provide regular income for around five years is then invested in the relevant instruments (like senior citizens savings scheme and post office schemes) and the residual amount of the kitty goes into stocks and gold for growth.

Don’t wait
Saving for retirement is one of those things for which you are never too late and never too early. Whether you have just plunged into the work force or soon to be checking out of it, start, if you have not already.
Start a systematic investment plan (SIP) in a few equity funds. This way, the money from your savings bank account will automatically get debited and you will get the units of the mutual funds that you have selected. The earlier you start, the more you’ll have to fund what could be nearly half your life.

Don’t get distracted
People succumb to excessive diversification when faced with a lot of choice. When it boils down to actually deciding what to buy, too much choice is clearly paralyzing.
Select a couple of well performing equity diversified funds. Pick them out from different fund houses and different categories too. Keep a track of these investments. If you find one of them faltering for a sustained period, replace it with another good fund. And keep it simple. In your retirement portfolio there is no need to go for thematic or sector funds. Don’t fall for schemes that appear specifically targeted for retirement. A few equity diversified funds with good track records should suffice.

Don’t get swayed by tax
Too often, people opt for annuity schemes just because they are getting the tax benefit. Similarly, they feel obligated to match the upper limit of PPF. This takes you away from the focus of wealth creation.
If the Direct Tax Code (DTC) comes to pass, the only investments that will get you the tax benefit are the PPF and the National Pension Scheme (NPS). It would be wise to consider the latter. Till this year, you have the option of investing up to Rs 1 lakh under Section 80C of the Income Tax Act in tax saving mutual funds. Make good use of this.

Don’t ignore insurance
Insurance is a must. But we are not talking of plans where you get annuity once you retire or schemes which club in insurance and investment. Keep the two separate.
You must ensure that you get into retirement very well covered from the medical insurance point of view. Even if you have a company mediclaim, it makes sense to opt for another cover for you and your family and you can increase the exposure later. If you wait to take a medical policy when you retire, you may not get one or it would be at a phenomenal cost with an entire list of sicknesses excluded.
If you are earning a pension (or will be on retiring) or getting an income and your spouse is not, then it would even make sense to take a term insurance plan so that your spouse has adequate funds in the unfortunate event of your death.

Don’t enter retirement in debt
We would suggest that all your debt be cleared around 10 years prior to retirement. This issue gets all the more relevant if you want to retire early or have opted for a voluntary retirement scheme (VRS). In that case, consider the 10 years before retirement as your debt-elimination decade. Have a realistic plan to pay it off.

The Checklist
1. How much is it you need?
A reasonable place to get started is by listing down your monthly expenses - how much you pay by way of utility bills and other basics. Assume an annual rate of inflation and factor that into account.
2. Will you be adding to your wealth once you retire or depleting it?
If you plan to take up a hobby on retirement, you need to factor in whether that is going to deplete your resources or add to it.
3. How much do you have
Do you own land which you can sell at a later date? Or will you be able to generate rent income? Will you be getting a pension? Are you getting a huge packet if you opt for a Voluntary Retirement Scheme (VRS)? All this would certainly make life much easier.
4. Act now
The quicker you act, the more secure your retirement will be. Draw up a plan for a retirement kitty and start investing into it. Do not touch it for any other expenses.