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Easy tips to help plan your retirement

Last updated on: October 27, 2010 08:24 IST

Easy tips to help plan your retirement


Anil Rego

Retirement from work life' is an event that many of us look forward to, this is where, the mundane routines take a back seat and it becomes a time when one pursues the long-forgotten hobbies / passions.

A recent statistic pointed out that over 80 per cent of individuals in India did not plan for their retirement; they ended up being financially unviable at retirement. For a lot of us, Provident / Pension funds are the only corpus that will actively cater to our heydays of retirement; this however, will not suffice! It may come as a rude shock, but that is what it all boils down to.

Importance of retirement planning
The longevity of individuals has increased, the number of working years, unfortunately haven't. Infact, employers prefer younger minds at the work desk, thereby reducing the number of earning years. Although many employers have a pension plan in place, in most cases it covers only a fraction of the actual pension needs.

There are a host of factors which will affect your household, inflation is just one of them. During one's earning years, investors are game for risk, to attain a good return may be practical, but the risk appetite gradually diminishes as you approach retirement. As you approach retirement accumulation strategies change to wealth preservation strategies.

Photographs: Uttam Ghosh/

Investment scenarios

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As we all know, starting early is key to achieving a higher corpus, in the meantime, it is also important to stay disciplined and consistent.

Investments should always be aligned to your financial goals, hence it is important to enumerate your requirement and factor-in all the nuances which will affect your investments. Here's a scenario analysis on how much one needs to save / invest to build a decent retirement corpus.

This gives a fair idea that one may have to stay consistent and focused to ensure that one builds the required corpus. It is also pertinent to remember that post retirement, you should not erode the capital; your pension should be funded by means of returns generated from the corpus built.

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Designing the portfolio

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We use multiple avenues to build the portfolio, categorically one has to limit equity holding to less than 30 per cent under all risk circumstances. Below mentioned are charts for low, medium and high risk profiles:

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Unconventional avenues

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Apart from the usual avenues, the investment world has strived hard to innovate on a regular basis, this has proved to be a boon in disguise for the investor, since it provides a whole new set of investment options.

Reverse Mortgage concept
A widely used instrument in the developed world by the elderly to derive cashflows from their owned house. In reverse mortgage, the retirees can pledge a property that they already own (with no existing loan on it). The bank in turn gives you a series of cash-flows for a fixed tenure.

The homeowner's obligation to repay the loan is deferred until the owner dies, banks bear the risk that the outstanding will exceed the market value of property then and will not ask for the difference from the heirs.

Structured Real Estate
This is a relatively new concept, wherein residential / commercial properties in the form of studio apartments, hotel rooms are available for investment, wherein they promise a regular cash flow over a pre-determined period. This income stream is essentially guaranteed, they are either in the form of rental income or fixed interest.

This could be for a second stream of income which could prove to be effective for retirement purposes. These options are superior to rental income from residential real estate because of the significantly higher rental yields.

Pension Plans
At present Pension plans remain an unattractive preposition, given that the proceeds are taxable, with the advent of the direct tax code, this avenue may become tax efficient. This will infact be a major boost to this avenue, there will be huge popularity when one sees this being brought into effect.

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A balanced approach would do the trick and maintaining risk profile at 'moderate' levels would be key to build the much required corpus. Planning for eventuality and medical (both self and family) becomes vital after you grow old, hence if you are above the age of 35 years, voluntarily plan for your medical contingencies, consider plans which will cover you till the maximum age and especially post retirement.

In the whole process of retirement planning, use tax efficient avenues to build the funds.

Tips for the week

  • Set a realistic retirement goal, deduce your risk profile, consider inflation.
  • Use avenues that provide post-tax returns which are higher than average inflation rate.
  • Look at the long-term picture and build a diversified / balanced portfolio.
  • Do not eat into your retirement corpus.
  • Plan for medical, emergency contingencies.
  • Try to rid yourself of all the liabilities prior to retirement.

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Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.