Plan Your Retirement Portfolio Right Now

Ideally, an individual should start planning for his retirement as and when he starts earning and should have a portfolio which delivers inflation-beating returns or else the value of savings will get eroded with time

Currently, with the advancement in medical industry, the life span of people is increasing.This is leading to an increase in the population of elderly people. In India, many of them do not possess adequate or a retirement plan due to which they depend on their children. As a result, children get burdened and they end up not taking care of their parents, which leave these elderly people unsupported. Nowadays this has become quite frequent and so looking at this situation you should start planning for retirement as early as possible so that you don’t end up in such a situation. Further, with the present scenario of rising inflation, you should hold an adequate financial plan which will serve to fulfil your goals.

In short, you should have a portfolio which delivers inflationbeating returns or else the value of your savings will get eroded with time. Ideally, an individual should start planning for his retirement as and when he starts earning. This will enable him to create a huge corpus for his retirement. The power of compounding works like magic in the longer term. Retirement might seem too far, which is why most of us ignore and postpone the planning of retirement as there may be other various commitments to fulfil. However, ignoring or delaying retirement planning might put an individual in huge financial stress during the sunset years.

In order to make the golden years of your life joyful and stress-free you should plan for retirement right now without delaying it anymore. A retirement portfolio should consist of a mix of investment instruments which will offer stability to your portfolio and won’t get affected adversely. Such a portfolio should consist of instruments which are inversely related. This is the best way of diversification as it will safeguard your corpus invested from undesirable eventualities. The formulation of a portfolio may vary according to the age and risk profile of the investor. Let’s have look at the same as we go further in the article.

Understand the Risk Profile
Risk profiles are related to age, life stage or the expected timescale of an investment. It is of prime importance to first understand your risk profile beforehand to start investing. You have to remember the trade-off between risk and return and also that investments have long-term perspective, designed to help save for retirement. It all comes down to the level of risk you are willing to take as well as the expected return on investment in view of the circumstances and investment goals. As an individual gets older, with time his risk appetite starts lowering down due to which he needs to make changes to his portfolio accordingly. The following table depicts the general risk profiles based on age and life stage:

Growth Portfolio
The prime aim of growth portfolio is capital appreciation and increasing the value of your retirement savings. Generally, young individuals have higher risk capacity and they tend to invest in such investment instruments which delver high returns and come along with higher risk. An individual should formulate his retirement portfolio in such a way that he will receive optimal benefits. In his early stage of his life, he should dedicate a higher proportion of his portfolio towards risky and volatile investment instruments which will deliver higher returns in the longer run. Growth portfolio or aggressive portfolio has more exposure to the equity markets, which makes it a ‘higher risk’ portfolio.

However, it comes with the potential of higher returns. This is the right portfolio for younger people who have time on their side for the markets to recover in case of adverse eventualities in the market. These investments in the equity market should be for a longer term in case of a retirement portfolio. One can invest in equity markets through various means such as directly, through mutual funds or ETFs. As compared to direct investment, mutual funds and ETFs have lower risk as they are professionally managed. Higher proportion of growth portfolio is towards high-risk investment instruments such as equity and lower proportion is towards low-risk investment instruments.

Balanced Portfolio
As an individual slowly approaches his retirement and start growing old he starts lowering down his risk and slowly shifts towards low-risk investment instruments. A balanced portfolio combines high-risk and low-risk investment instruments in a portfolio in an attempt to balance the risk and return. This portfolio seeks for moderate level of risk which ensures stability in the portfolio, less exposure to the equity markets and shows less growth. However, it also lowers down the volatility. As the risk is lower, returns will also get lower. That is why an individual should invest a higher proportion of the portfolio in equity in the early stage of life and appreciate the capital. Here one invests approximately the same proportion towards equity as well as debt or income instruments.

Income Portfolio
As an individual retires, he has no capacity to take any risk as he may desire to spend the sunset years stress-free. This portfolio offers long-term sustainability. The aim is to generate an income stream that can compound and increase the value of your investment. This topic has been covered in detail in our Query Board column. It also seeks to provide protection that often appeals to pre-retirees. The conservative portfolio shows less growth but minimal fluctuations and the goal is to protect the investor’s corpus. Therefore, it is known as minimum risk portfolio. There are various conservative investment instruments such as debt mutual funds, Public Provident Fund, post office saving schemes, etc. In India, these investment instruments are well-known for saving for retirement as they offer stability along with fixed income.

It is common and accepted wisdom that the longer your investment horizon (the longer the period of time until your retirement), the more aggressive you should be in seeking higher yielding investments. Conversely, as we approach retirement years and there is need to start tapping our retirement plans, we need to re-evaluate our investment strategy and begin transition into lower yielding yet safer investments. There is a downside to this strategy too. We are living longer now than ever before. The transition strategy may be too conservative if we end up living 10 years more than our parents did. In light of this, you may want to invest slightly higher in stocks at any particular retirement age. The investment strategy and risk appetite may vary from individual to individual.