Some tips on retirement planning- Start early and invest methodically” needs to be a motto for all.

The trouble is, while a dreaded winter will inevitably lead to a cheerful spring, a malfunctioning retirement plan can go from bad to worse

The truth about retirement planning is not easy to digest, its bitterness can be felt at every turn — on mornings when newspapers record a Rs 50 hike in cooking gas prices, on afternoons when a favoured debt security loses its credit rating, on evenings when a government report signals economic growth numbers that are far from satisfactory. You just grin — no, sigh — and bear it all. : Shutterstock

Nilanjan Dey   |  TT   |    21.12.20  :  The perfect retirement plan is as elusive as a smog-free winter morning in Calcutta, and even as you read this on Monday morning, the average retired person is grappling with bigger shortfalls, declining yields, widening gaps between what he has saved and what he really needs in his twilight years. 

The trouble is, while a dreaded winter will inevitably lead to a cheerful spring, a malfunctioning retirement plan can go from bad to worse. There may well be serious challenges on the way; steep inflation rates will, for example, forever remain a grave concern for the retiree. An unanticipated spell of high expenditure can suddenly reduce his corpus, and a much-cherished investment can go belly-up for reasons beyond anyone’s control, thus hitting his portfolio in a debilitating manner.

The truth about retirement planning is not easy to digest, its bitterness can be felt at every turn — on mornings when newspapers record a Rs 50 hike in cooking gas prices, on afternoons when a favoured debt security loses its credit rating, on evenings when a government report signals economic growth numbers that are far from satisfactory. You just grin — no, sigh — and bear it all.

Let us dedicate ourselves not to such imperfections, but to ways in which retirement plans can be generally fortified against the impact of these challenges. In a backdrop marked by nearly-constant price hikes, relentless taxes and uncertain market conditions, how can the average individual still generate a sense of comfort, courtesy his retirement plan?

Higher, stronger, smarter

Here are some considerations for you:

⦾ A substantial part of your corpus must be allocated to fixed-income securities, including ones that provide you with assured returns. These will come to your succour when the rest of the market (read: the part that wallows in uncertain performance) fails to live up to your expectation.

⦾ A portion of your overall portfolio needs to be invested in market-driven performers as well. These will, as you no doubt understand, be risky as returns may not be generated in the desired manner. However, in this day and age, when market-determined yield is supreme, you cannot simply do without these assets.

⦾ Your single-minded goal must necessarily be driven by the need to beat the impact of taxes and inflation. The two of these are enough to keep you on tenterhooks for the rest of your active life. And for a retired person without an active income stream, this is by far the most serious consideration.

The higher-stronger-smarter objective can be achieved if the individual has started allocating resources sufficiently early in life. This means, the perfect retirement plan is a function of time — a luxury that many of us do not have. “Start early and invest methodically” needs to be a motto for all.

Some points for you

That motto, I must point out, can be actually rendered more efficient if the individual concerned keeps an eye on costs. Managing the latter poses a grave task for a retiree. Further, to be simply aware of costs is one thing, to really keep them on a tight leash happens to be a totally different challenge.

In this context, I will draw your attention to the following issues:

⦾ Management of costs is very much part of your investment strategy. Brokerages, commissions, loads and sundry other expenses (including compliance fees that you may pay for audits and similar exercises) can add up to be a formidable number at the end of the year.

⦾ Too many transactions will augment your costs. The higher is the number of transactions, the more is your aggregate cost of transaction. So if you have purchased and sold a stock many times, you will pay a tidy sum to your stock broker.

⦾ Your net returns must be calculated after you account for these costs as well as other deductibles, including taxes. Net figures, which are often a good distance away from what are actually advertised, help you stay rooted to reality. You get to know what you have finally earned, and whether your money has truly grown on a year-on-year basis.

And, at the end

It is far too easy to suggest that an individual should ideally explore other avenues to earn after retirement. Rare is the man who does it with elan in his golden years; rarer still is the willingness to learn new trades or weigh other professional alternatives. No, all the best-laid plans are built on the same foundations — early start, methodical investment regimen, financial discipline, efficient asset allocation, cost management and so on. The perfect individual will take care of all these, but he will also do more. He will pare expectations, perhaps delay gratification as well.

Such an investor will, nevertheless, forever keep his eye on the ball. Risk control will be his preferred mantra at all times. Risk and returns are of course never too far away from one another, their relationship being a sacrosanct tenet in the realm of investment.

The higher the risk, the higher is the potential return. Let that be gospel truth in your case too. In other words, the average retiree like you needs to be completely aware of your risks. Each asset class you have invested in has its set of risks to contend with. Equities and commodities are generally riskier, while debt has a relatively stable orientation. The risk-return scale can never be too far away from your radar. 

The writer is director, Wishlist Capital Advisors