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5 Points For New Gen To Plan Their Retirement
Mar 17, 2017

Willis Towers Watson, a leading global advisory, broking and solutions company surveyed 30,000 employees across 19 countries from June to August 2015 on their outlook towards health and retirement. The findings of the report were published in January 2016. There were 2,003 employees that participated in this survey from India.

The findings...

Among the total employees that were surveyed, 59% of the participants from Asia Pacific worried about their financial security, and wondered if they had accumulated enough for a peaceful retirement that may span over 25 years.

From the survey, it is evident that most individuals believe that they don't have sufficient funds for their twilight years. 70% individuals from the Asia Pacific region are completely dependent on their retirement plan and 50% of the individuals would prefer a guaranteed retirement benefit.

The stats are a startling eye-opener and indicate that it makes sense to plan for one's retirement as early as possible. Here is a step-by-step approach:

  1. Start early: The early start helps to make the optimum utilization of the power of compounding. As per the survey, since most individuals would be completely dependent on their retirement corpus to fund their golden years, it is financially prudent to start as early as possible. To begin with, make sure to allocate at least 20% of the investments towards retirement. This percentage should go up with time.

    Make use of PersonalFN's Retirement Calculator to get an estimate on the corpus required as per your current living standards. This would help in saving the right amount for one's retirement.

  2. Know your risk profile: One has to assess the risk taking ability before investing. In fact, it is the foundation stone to guarantee a stress-free retirement life. It is no point investing in stock markets, if you lose sleep over market fluctuations.

    However, most ignore this important step and start investing; ending up with bruises and burns. To minimise investment shocks, here is a simple question to know one's attitude towards risk:

    You enter a bet with a friend who flips a coin.

      - If the coin comes up heads, you win Rs 500. If it comes up tails, you win nothing

      - If you choose not to flip the coin, your friend will simply give you Rs 250 and the game is over

    The expected outcome in each of these scenarios is an average of Rs 250. But depending on which option you choose, you understand what type of investor you can be. So, spare a few minutes to introspect.

  3. The asset allocation strategy: Based on the risk profile, here's an asset allocation strategy:

    Option 1: You choose not to flip the coin and take Rs 250

    If you choose not to play the game, and took Rs 250, or would take even less than Rs 250 as long as there was no risk attached; you are risk averse or conservative investor. The market fluctuations are bound to give you sleepless nights. Your composition to equity should fall as the time for your retirement nears.

    If your Risk profile is Low to Medium your ideal asset allocation should be
    Years to retirement Equity Debt Gold
    <=3years 5% 90% 5%
    4 years 30% 65% 5%
    5 years 35% 60% 5%
    6-7years 45% 45% 10%
    8-10 years 60% 30% 10%
    > 10 years 70% 20% 10%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    Option 2: You are unable to make a decision between flipping the coin and not flipping the coin

    You are a risk neutral or moderate risk taker if you are neutral between playing the game and winning Rs 500, and not playing the game but taking Rs 250. The ideal asset allocation composition should be as follows:

    If your Risk profile is Medium to High your ideal asset allocation should be
    Years to goals Equity Debt Gold
    <=3years 10% 85% 5%
    4 years 40% 55% 5%
    5 years 45% 45% 10%
    6-7 years 55% 35% 10%
    8-10 years 70% 20% 10%
    > 10 years 80% 10% 10%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    Option 3: You want to flip the coin and take the chance

    If you would rather take the gamble for any amount more than Rs 250; you are a risk seeker or aggressive.

    If your Risk profile is Medium to High your ideal asset allocation should be
    Years to goals Equity Debt Gold
    <=3years 15% 80% 5%
    4 years 45% 45% 10%
    5 years 50% 40% 10%
    6-7 years 60% 30% 10%
    8-10 years 75% 15% 10%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    So, before going hysterical over what your next door neighbour is earning, have a look at your portfolio and assess if it is in sync with your risk profile and the years left to achieve your goal, and rebalance it if required.

  4. Review your portfolio on a regular basis: It is a prudent practice to review one's portfolio on regular basis and take preventive measures. A strategy on rebalancing the portfolio helps to keep the weight of each asset class back to its original state by buying and selling portions of your portfolio.

    If you are wondering how to go about it, here's an example to understand the concept better.

    Say Mr Rishabh has Rs 100,000 to invest and being a moderate risk taker, he decides to invest 50% in Debt (Rs 50,000); 10% in gold (Rs 10,000); and the balance 40% in equity (Rs 40,000)

    Rishabh's Portfolio at the start of the year
    Asset Class Amount (Rs) Percentage allocated
    Equity 40,000 40%
    Debt 50,000 50%
    Gold 10,000 10%
    Total 1,00,000 100%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    After one year, Rishabh's equity composition in his portfolio has outperformed his debt and gold investments. This has changed the allocation of his assets, increasing his percentage in the equity fund while reducing his allocation towards debt and gold. The revised portfolio composition looked as follows:

    Rishabh's Portfolio at the end of the year
    Asset Class Amount (Rs) Revised Allocation Return (%)
    Equity 55,000 46.53% 37.5%
    Debt 53,000 44.84% 6.0%
    Gold 10,200 8.63% 2.0%
    Total 1,18,200 100% 18.2%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    The table above highlights that Rishabh's investment of Rs 100,000 has grown to Rs 1,18,200 giving a portfolio return of 18.2%. Equity was the biggest gainer and earned a return of 37.5% followed by debt with 6%; while his investment in gold disappointed by returning a mere 2%. Thus making the portfolio more skewed towards equities.

    Seeing a deviation of +/- 5% from his standard allocation, if Rishabh plans to rebalance his portfolio at the end of the year, then it would look as follows:

    Rebalanced portfolio at the end of the year
    Asset Class Amount (Rs) Revised Allocation
    Equity 47,280 40%
    Debt 59,100 50%
    Gold 11,820 10%
    Total 1,18,200 100%
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    At this juncture, Rishabh might book some profit from equities and invest it in debt and gold, thus bringing back allocation towards equity, debt, and gold to 40:50:10. With this, he has eliminated some equity related risk by shifting to a relatively safer asset class like debt and gold.

    However, he may decide to leave his portfolio as it is, without trying to rebalance the same, only if he is comfortable keeping a threshold of +/- 10% deviation from the standard allocation.

    It is noteworthy that rebalancing is an important part of financial planning, which should not be ignored. Allowing your portfolio to remain the same over long term may not be a prudent way forward to achieve your financial goal.

    The popular belief among investors is to look at historical returns before choosing a fund or an asset class. What had performed well in the last year may not perform as well in the future. But, they are induced by the returns and avoid rebalancing the portfolio.

    Continuing with Rishabh's example, let us assume that at the end of the second year, equities performed badly losing 7%. At the same time, the Debt funds performed well appreciating by 12% and gold was relatively stable with a 6% increase.

    Asset Classes Rebalanced Ignored
    Opening (Rs) Closing (Rs) Opening (Rs) Closing (Rs)
    Equity 47,280 43,970 55,000 51,150
    Debt 59,100 66,192 53,000 59,360
    Gold 11,820 12,529 10,200 10,812
    Total 1,18,200 1,22,691 1,18,200 1,21,322
    (Note: The above table is for illustration purpose only)
    (Source: PersonalFN Research)

    A rebalanced portfolio in this case would have generated better returns. However, if the stock market had rallied throughout the second year too, then the equity fund would have appreciated more, leading the ignored portfolio to probably realise better returns than the rebalanced one.

    Although, individuals may be blinded by gains, rebalancing helps to maintain the risk-return tolerance level.

  5. Withdrawal Rate: Once you retire, bear in mind, you only have the retirement corpus to fund your retirement. With the growing life expectancy and increase in medical costs, it would be a prudent practice to use the corpus judiciously. Make a practice to keep your withdrawals as low as possible. Make sure to follow the 4% p.a. withdrawal rule. It is a thumb rule to determine the amount of funds to withdraw from a retirement account each year. The 4% rate is considered a "safe" rate, with the withdrawals consisting primarily of interest and dividends. The success of the rule is possible only when a retiree sticks to the rule diligently year after year. The retiree may suffer from a cash crunch further in his/her retirement, if he/she violates this rule by splurging on big ticket purchases during this phase in life.

To Conclude...

73% of individuals surveyed from the Asia Pacific region felt a higher level of stress due to their poor financial health. This stress affected their health (52%) leading to absenteeism from work and drop in productivity.

The only way to ensure a stress-free retired life is through a well drafted financial plan that takes into account not only your financial goals, as well as your outlook towards money.

You need prudent advice from Certified Financial Guardian to maximise your savings and retire comfortably. To learn more about how you can retire with peace of mind, subscribe for The Retirement Letter.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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