Article

Top 5 Secrets of Successful Retirement Planning

25 Sep 2019

Quite often, the very name of retirement planning is a misnomer because it starts when you start your career. But your retirement plan is likely to be most successful if it is started early, sustained in a disciplined manner and the risks are appropriately managed. Here are the essential five secrets of successful retirement planning.

Start early and rely on equity mutual funds

By now you must have read enough about the time value of money to be able to grasp this point. The bottom line is that the earlier you start, the longer you keep investing money. That is when the compounding effect starts playing out. Compounding means that your principal earns returns, the returns are reinvested and over time both your principal and returns get continuously reinvested. This may appear to be simple mathematics but the impact on wealth can be huge in the long run. Consider the impact of time on HDFC Top-100 Fund over different time frames

Fund Name

Investment Tenure

Monthly SIP Outlay

Total amount invested

Value at the end of tenure

Wealth Ratio

HDFC Top100 G

5 years

Rs.5,000

Rs.3 lakhs

Rs.3.74 lakhs

1.25 times

HDFC Top100 G

10 years

Rs.5,000

Rs,6 lakhs

Rs.10.73 lakhs

1.79 times

HDFC Top100 G

15 years

Rs.5,000

Rs.9 lakhs

Rs.27.21 lakhs

3.02 times

HDFC Top100 G

20 years

Rs.5,000

Rs.12 lakhs

Rs.106.67 lakhs

8.89 times

Data Source: Value Research

There are two things that logically follow from the analysis above. Firstly, as the tenure is increases, the power of compounding becomes more potent. Of course, this benefit will work best if you are invested in equity mutual funds. Debt funds or liquid funds will not do the job.

Adopt a systematic approach to retirement planning

What is meant by a systematic approach? In mutual fund parlance it is calls a systematic investment plan or a SIP. Instead of investing in a lump sum, you invest a small amount each month. In the above table, an investment of just Rs5,000 per month helps the investor create wealth to the tune of Rs.1.06 crore over 20 years. But why systematic investing? Firstly, it synchronizes with your cash flows. Whether you have salary flows or business income, it tends to be periodical. When you adopt a SIP approach to investing, you don’t feel the pressure as it synchronizes with your inflows. Secondly, it builds a discipline. You actually work out the monthly SIP requirements and then work backwards to structure your budget accordingly. Lastly, it is hard to identify tops and bottoms in the market and it also does not really matter. The SIP automatically evens out the volatility in the markets through a systematic approach.

Not just money, also plan your insurance needs

There are two aspects to insurance. Firstly, it is about insuring when your retirement plan is in progress. You must ensure that your family has enough medical cover to take care of medical and hospitalization needs. Of course, your life must be insured with a large enough term plan so that your family does not end up paying a steep price. Above all, assets and liabilities must be covered so that there are no nasty surprises.

The second aspect of insurance is taking care of insurance after retirement. You obviously, don’t require an aggressive life policy but a life cover will surely give comfort to your spouse. More importantly, ensure that the medical needs are adequately covered as that could pose the biggest challenge.

Ensure liquidity around milestones

We often do not give too much importance to this aspect but it is critical to make liquidity available when required. Let us take an example. Say that your retirement is due in 3 years from now and you are predominantly invested in equity funds. Now the risk is that when the equity funds actually come for redemption, the equity markets may be on a downtrend and hence the corpus may be 10% lower. This could put your plans off track. A better way is to migrate to debt funds at least 3 years in advance and shift fully to liquid funds one year ahead of the milestone. That way you may lose out on some returns but you don’t run the price risk.

Direct stock investments can add alpha to your retirement plan

Finally, retirement does not mean that you give up on equities. Have an online trading account and invest in stocks online. Don’t go for speculative stocks but quality stocks that can create wealth over time. You can start to invest in stocks online even when you are planning your retirement. You can also continue to invest in stocks after retirement as this can give a much needed kick to your portfolio returns.

Retirement planning goes beyond just allocating a fixed sum to an equity mutual fund. If you take care of these bells and whistles, you will have a much happier retirement.

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Top 5 Secrets of Successful Retirement Planning

25 Sep 2019

Quite often, the very name of retirement planning is a misnomer because it starts when you start your career. But your retirement plan is likely to be most successful if it is started early, sustained in a disciplined manner and the risks are appropriately managed. Here are the essential five secrets of successful retirement planning.

Start early and rely on equity mutual funds

By now you must have read enough about the time value of money to be able to grasp this point. The bottom line is that the earlier you start, the longer you keep investing money. That is when the compounding effect starts playing out. Compounding means that your principal earns returns, the returns are reinvested and over time both your principal and returns get continuously reinvested. This may appear to be simple mathematics but the impact on wealth can be huge in the long run. Consider the impact of time on HDFC Top-100 Fund over different time frames

Fund Name

Investment Tenure

Monthly SIP Outlay

Total amount invested

Value at the end of tenure

Wealth Ratio

HDFC Top100 G

5 years

Rs.5,000

Rs.3 lakhs

Rs.3.74 lakhs

1.25 times

HDFC Top100 G

10 years

Rs.5,000

Rs,6 lakhs

Rs.10.73 lakhs

1.79 times

HDFC Top100 G

15 years

Rs.5,000

Rs.9 lakhs

Rs.27.21 lakhs

3.02 times

HDFC Top100 G

20 years

Rs.5,000

Rs.12 lakhs

Rs.106.67 lakhs

8.89 times

Data Source: Value Research

There are two things that logically follow from the analysis above. Firstly, as the tenure is increases, the power of compounding becomes more potent. Of course, this benefit will work best if you are invested in equity mutual funds. Debt funds or liquid funds will not do the job.

Adopt a systematic approach to retirement planning

What is meant by a systematic approach? In mutual fund parlance it is calls a systematic investment plan or a SIP. Instead of investing in a lump sum, you invest a small amount each month. In the above table, an investment of just Rs5,000 per month helps the investor create wealth to the tune of Rs.1.06 crore over 20 years. But why systematic investing? Firstly, it synchronizes with your cash flows. Whether you have salary flows or business income, it tends to be periodical. When you adopt a SIP approach to investing, you don’t feel the pressure as it synchronizes with your inflows. Secondly, it builds a discipline. You actually work out the monthly SIP requirements and then work backwards to structure your budget accordingly. Lastly, it is hard to identify tops and bottoms in the market and it also does not really matter. The SIP automatically evens out the volatility in the markets through a systematic approach.

Not just money, also plan your insurance needs

There are two aspects to insurance. Firstly, it is about insuring when your retirement plan is in progress. You must ensure that your family has enough medical cover to take care of medical and hospitalization needs. Of course, your life must be insured with a large enough term plan so that your family does not end up paying a steep price. Above all, assets and liabilities must be covered so that there are no nasty surprises.

The second aspect of insurance is taking care of insurance after retirement. You obviously, don’t require an aggressive life policy but a life cover will surely give comfort to your spouse. More importantly, ensure that the medical needs are adequately covered as that could pose the biggest challenge.

Ensure liquidity around milestones

We often do not give too much importance to this aspect but it is critical to make liquidity available when required. Let us take an example. Say that your retirement is due in 3 years from now and you are predominantly invested in equity funds. Now the risk is that when the equity funds actually come for redemption, the equity markets may be on a downtrend and hence the corpus may be 10% lower. This could put your plans off track. A better way is to migrate to debt funds at least 3 years in advance and shift fully to liquid funds one year ahead of the milestone. That way you may lose out on some returns but you don’t run the price risk.

Direct stock investments can add alpha to your retirement plan

Finally, retirement does not mean that you give up on equities. Have an online trading account and invest in stocks online. Don’t go for speculative stocks but quality stocks that can create wealth over time. You can start to invest in stocks online even when you are planning your retirement. You can also continue to invest in stocks after retirement as this can give a much needed kick to your portfolio returns.

Retirement planning goes beyond just allocating a fixed sum to an equity mutual fund. If you take care of these bells and whistles, you will have a much happier retirement.