We long for happy retirement years and often have a list of to-dos. From going for vacations, pursuing hobbies or catching up with friends and family, the list is long and rightly so. Retirement should be filled with activities that give us happiness and peace of mind. All this can be nullified if our finances are not in place.
Always Start Early – Retirement planning should start with your first pay. Most individuals are unaware of the magic of compounding. The longer you stay invested the higher the corpus you will accumulate. For example, person A starts when he is 25 yrs, a monthly investment of Rs. 5,000, and accumulates more than Rs. 2,75,00,000/- at the age of 60 years, compared to person B starting at 35 yrs, monthly investment of Rs. 5,000, and accumulates just Rs. 85,00,000/- at the age of 60 years. By starting 10 years early, person A has more than 300% of what person B accumulates.
Asset Allocation – The ideal asset allocation is a function of the investment time horizon and risk profile. Longer the time horizon, higher the allocation that can be made towards equities and lower the risk profile higher the allocations to fixed income instruments. We have observed many youngsters having low allocations to equities. This considerably reduces the return potential from your investments.
When you are young, you have greater risk taking capability and longer time horizons and therefore you should take advantage of this and allocate greater portions of your portfolio to equities and generate positive real rate of returns by beating inflation and taxes. As you near your retirement, it becomes necessary to move to safer fixed income instruments and plan for regular cash flows.
Cash Flow Management – Most retirees tend to become asset heavy and have poor liquid assets. For the love of real estate, most individuals end up having a disproportionate percentage of their net worth in illiquid assets. This causes major strain to their cash flows and they end up selling those assets at a distress or worse having to depend on family for emergency. Since it is common for retirees to have huge medical expenses or have a strong inclination to travel, it is suggested that one has a large portion of their net worth in financial assets as they can be easily liquidated.
Tax Efficiency – High taxes is something that we all want to avoid. Especially during our retirement. While it is important to have fixed income instruments in one’s portfolio, it is prudent to know how the cash flows from such investments will be taxed. Pension funds are very popular, but very few people know that the income from them are treated as income from salary and is taxed. A qualified investment adviser will be help you to devise a strategy that is tax efficient while protecting your corpus.
Expert Advise – While google is an excellent source for information, there is an information overload. There is way too much misinformation which can cause you harm. Most people hesitate to seek help of a fee-only financial planner and end up in a mess due to their DIY efforts. A SEBI registered investment adviser and help you take the right financial decisions and devise a strategy to optimize available resources.
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