The work of Retirement Planner is not juggling you in different asset classes and hope to see results. There are some time-tested theories, which are used by them to achieve desired results, by minimising the risk, choosing the asset properly and rebalancing these asset classes. No, it is not like your normal investments – it is more precise and advanced. Retirement Planning some features of financial planning but the process is different as the goal is different. This post will help you understand this and will make you differentiate between other styles of investments.
This is the third and last post on Retirement Planning Question and Answer Series. Let’s start answering few more questions:
How is Retirement Planning different from Financial Planning?
Financial planning is a process of setting objectives vis-à-vis your current income. It involves assessing your currents savings and assets, estimating future financial needs, and making plans to achieve monetary goals. Retirement Planning goes beyond financial planning or providing investment advice and is aimed at achieving financial security for retirement. It is a holistic solution aimed at enabling people to achieve their financial dreams both before and after retirement.
How is a retirement advisor different from an insurance agent/wealth advisor/investment planner?
While an Insurance Agent/Wealth Advisor/Investment Planner has a targeted audience with a specific objective either to cover life risks or ensure better returns on investments, the scope of a Retirement Planner is focused on advising solutions aimed at retirement security. This includes the entire gamut of services in terms of Advisory, Insurance, Asset Allocation, Retirement Pension Investments, Distribution of Estate (Will Planning) & Retirement Planning.
What is wealth?
Books have been written over this. But scientifically- Wealth is the difference of value between what you own (assets) and what you owe (liabilities). Wealth enables you to achieve your financial goals by increasing your assets and decreasing your liabilities. It is the overall reserve of assets (cash, fixed assets, savings etc.) which you have after meeting your liabilities.
How does Retirement Planning help in accumulating wealth?
A well-conceived retirement plan ensures you meet your expenses adequately at various stages of your life including your liabilities and contingencies. Wealth creation is a lifelong process and so is retirement planning. Accumulating wealth and simultaneously incurring cost for meeting your needs warrants that you have proper wealth creation and management strategies in place. Retirement Planning is one of the most important strategic exercises that you need to do to accumulate wealth.
Can retirement planning beat inflation?
The very first aim is to beat inflation. Inflation can erode your retirement corpus and diminish the purchasing power of your savings. It’s necessary to absorb the impact of inflation with a sound and prudent Retirement Planning strategy in place. It’s important to make realistic projections for the rising rate of inflation and adjusting your savings accordingly. Seek professional / expert advice to create an investment portfolio which gives you higher returns and helps you meet rising costs and inflation.
Are regular / traditional savings like PFs, PPFs, EPFs etc. not enough to take care of life after Retirement?
No, regular savings including PFs, PPFs, EPFs, bonds or any debt instrument are no longer enough to see you through your life after retirement. The returns from these regular default investments are guaranteed but low in comparison and are not sufficient to beat inflation and market volatilities. Besides, the quantum of savings made in these instruments might not be enough if future requirements are not carefully considered and planned for. Today Retirement Planner uses Equity Investments coupled with your risk appetite to devise a plan which can lessen return volatility and beat inflation.
What is asset allocation?
Asset allocation is essentially an investment strategy to stabilize risks and returns by choosing investment instruments according to your financial goals, risk tolerance
and time horizon. Asset classes have different levels of risk and return variability. Each asset class may perform differently over time. Successful asset allocation requires finding the proper mix of assets to balance reward with an acceptable level of risk.
Why is asset allocation critical for retirement planning?
Asset allocation is critical for long-term investing and retirement planning as it can help absorb the impact of market fluctuations and balance your tolerance for risk. A downside of a specific asset class is usually neutralised by an upside of another asset class. This way you can enjoy the upside and de-risk the downside to a great extent. Asset allocation is one of the most important steps in retirement planning and research has shown that 90% of returns are on account of asset allocation decisions.
How can asset allocation absorb the impact of market fluctuations?
Prudent asset allocation can help you ride out the ups and downs of long-term market performance. No single asset class will outperform another consistently and no single asset allocation strategy may be right for everyone. Some investments may be up while others may be down helping minimize the overall potential impact of market decline and enable you to reach your retirement goals smoothly.
How can I balance my risk tolerance?
High-yield assets typically experience high volatility. You can balance these assets by investments with lower but guaranteed rates of return (like debt or sovereign instruments) to protect against large-scale decline in value.
How do I go about my asset allocation?
Prudent asset allocation can help you balance your appetite for risk within your timeframe and retirement goals. This requires assessing, adjusting and tracking your investments regularly.
Assess your portfolio — Assess your portfolio allocation regularly to make sure it matches your risk tolerance, time horizon and retirement goals and needs.
Adjust your allocation — Adjust your allocation mix and re-align it to your retirement goals based on your risk tolerance and investment horizon.
Track your investments — Revisit your asset allocation regularly to make sure your investments are aligned with your retirement goals, since your investment timeframes and risk tolerance may change over time.
How often do I need to check my asset allocation?
A 3-6 monthly financial check-up for the short term and a three-year long-term horizon check to make sure your investments are aligned with your risk tolerance and long-term retirement goals is usually recommended. However, you need to review your portfolio when you anticipate a major life-event.
How do I ensure that my retirement savings do not erode over time?
You would be required to do the following:
- Make a realistic assessment of your existing wealth and risk appetite based on your life-stage.
- Perpetuate your income ladders.
- Make wise investments and stay invested.
- Make wise choices and do not overestimate or underestimate your options.
- Be prudent and disciplined with your finances.
- Seek professional advice.
How do I continue building wealth even after retirement?
It is necessary to continue building wealth even after you retire. Some of the ways to make more wealth out of your preserved wealth are:
- Reinvest in annuities, debt instruments and equity investments.
- Avail tax free investment options as far as possible.
- Invest in debt funds with dividend options.
- Take all tax breaks available under senior citizen schemes.
- Again I say- seek professional advice.
I have tried answering all that came to my mind. Drop a comment if you need details or you wish to clarify anything. My aim is to tempt you to start thinking on Retirement Planning seriously as this is the single key towards a prosperous and stress free life.