Planning Retirement? A Strategic Guide To Ensure A Comfortable Future

As the famous Chinese proverb goes, "The best time to plant a tree was twenty years ago. The second best time is now." This encapsulates the essence of retirement planning that we're going to delve into today.

For most of us, when we start in our twenties, retirement planning seems a little too alien. It seems far off to worry about at the time. Studies suggest, millennials today, do not stress over retirement plans, pensions or employer-matched contributions. They place a higher emphasis on education, tech-savvy, flexible working arrangements; most importantly, meaning and passion over a larger paycheck while making career decisions. This is neither good nor bad. But retirement planning in younger years ensures a comfortable retirement and financial freedom in old age.

Three factors determine your saving for retirement. These include time, contributions and returns. A retirement plan should therefore be devised in such a way to incorporate the aforementioned factors. It should also understand the interdependence between them. The risk appetite of individual decreases as the years go by. Therefore, one needs to make the necessary changes to their investment portfolio over the course of their plan.

Let's understand this in a little more detail.

If you start investing towards your retirement in your twenties, you should have an aggressive approach at the time and make high-risk investments for a higher yield. The thirties come about with an increase in purchasing power and this is the time to diversify your portfolio in line with your risk appetite. Since retirement is nearly 30 years off, you shouldn't be too conservative. You should prefer equities over bonds as there's enough time for the market vicissitudes to play out. In your forties, you need to be a little more defensive in your approach and incorporate more conservative assets.

Your main objective in your fifties and possibly to the point of retirement should simply be to mitigate risk as much as possible and to not lose any of what you have gained over the course of the decades. This requires you to change your investment portfolio and move to safer options at least a few years before your retirement. These include bank deposits, government-sponsored schemes or debt mutual funds. This ensures that the volatile stock markets do not have any unfavourable effects on your investment portfolio.

Now let's assume that you are in your late thirties or early forties and you're planning your retirement. So, you would need to take a different approach. Since you'd have lost out on the power of compounding to some extent, which makes a huge difference, you would have to make necessary changes to your plan. Ideally, you should have at least twenty-five times your annual living expenditure in your retirement fund, with an emergency fund (6 months income) and life and health insurance policies in place.

So let's look at the steps you would need to take to have a comfortable retirement.

Firstly, you need to have a clear picture of your income and expenditure and a list of your assets and liabilities. Secondly, you have to up the rate of savings quickly to have the money work for you. Thirdly, pay off expensive loans, if any, as early as possible so that that interest amount can be diverted towards investing. Fourthly, determine the cost of achieving your short and long term financial objectives. Once you take inflation into account, you would have a ballpark figure of how much you would need to invest monthly to achieve your objectives. And lastly, increase PF contributions if you are a salaried employee and go for a PPF or NPS if you are self-employed.

Things to keep in mind:

Review your portfolio at least a couple of times a year. Underperforming schemes should be dealt with. Invest in a bear market and sell in a bull market and not vice versa. Never break compounding mutual funds or fixed deposits to generate liquidity. The slow growth and its tenure can be frustrating but by breaking them, you would lose out on quite a bit. Incorporate taxes and inflation while calculating returns. Invest in things you fully understand. For instance, invest in Startups because you understand venture capital; in Stocks, because you understand trading; in Gold, because you understand commodities etc. Sometimes it's to your advantage if you double down your investment in what's working rather than diversifying for the sake of it. This, of course, needs to be in line with your risk appetite. This way, you might achieve supernormal returns.

Always remember, the way to financial freedom is not a sprint, it's a marathon. The earlier you start, the more you accumulate.