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Tune up for Retirement

Retirement is one distant financial goal that is largely overlooked by most of us. The irony is that those who pay attention to it early in their life stand to gain more from it than those who do not. With increasing life expectancy, the non-earning period can make the retirement years stressful if one does not plan in advance. The earlier one starts saving for retirement, the smaller the total outgo. Once you decide to make regular investments towards your retirement plan, exploit the full potential of equities as it has delivered the best returns among all asset classes in the past. Mutual funds have proved to be the ideal vehicle for retail investors to take advantage of the excellent long-term growth of the stockmarket.

THE PLANNING GRID

Saving a few thousand rupees every month does not require much effort. So, devise a plan and stick to it. Putting aside 10 per cent of your takehome salary in a retirement basket should not hurt. Launching a retirement programme when you are 55 years, is 18 times more expensive than doing so at 25 years. Once you start accumulating your retirement funds, you will want your money to work harder for you. 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. When you are young, with more disposable income and fewer liabilities, you are more likely to take risks. The type of asset you choose to invest in also depends on certain 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

Before you start saving, workout how much is required. 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 amass a corpus that could provide you with the inflated monthly amount. Without knowing the monthly savings required, one should not venture into planning and saving for one’s retirement.

WHERE TO INVEST

If you are starting out young, your funds portfolio should be heavy on equity funds - around 80 per cent. Aggressive investors can invest 30 per cent of their equity funds portfolio in mid-cap and small-cap funds. These schemes target a smaller group of lessvisible and less-traded stocks and are considered more risky. In your 30s, lighten up your equity funds holding marginally - the aggressive investor from 80 per cent to 70 per cent and the conservative investor from 60 per cent to 40 per cent. In the 40s, the best bet for the aggressive investor to negotiate this tightrope is a perfectly balanced exposure to both debt and equity. The conservative investor may choose a 10-20 per cent higher debt allocation. On the debt side, however, you’ll likely explore options that promise greater surety of returns - floatingrate funds and fixed maturity plans. In the 50s, ensuring yourself a secure, comfortable retirement gets top priority. To ensure the safety of your capital, you will now wait for an opportune time to migrate your money from volatile equity to the safer debt. The process of derisking will be discussed in the next part of the article.

Next To Come: Second Rite of Passage