5 Retirement Investment Strategies to Create a Retirement Portfolio

Published On: 02-Nov-2020

While retirement planning is often discussed, not many take it seriously. Since the post-retirement phase generally does not have regular cash flows, it is crucial for the investors that their financial plans consider all the eventualities. It is also essential that investors have enough investment corpus to maintain their lifestyle and take care of medical expenses post-retirement. 

Here are five retirement investment strategies to create a retirement portfolio:

Have a Plan

One should plan for the retirement portfolio by carefully analysing the projected corpus requirement and having a plan to accumulate such a corpus over the earning age. One should prepare for making regular investments into the specified mutual fund schemes through Systematic Investment Plans (SIPs). 

Once the SIP is registered, the investment amount is deducted from the bank account and invests in the mutual fund scheme as per the SIP mandate on a specified date. The investments continue to be made across the market movements and without any manual intervention post SIP registration. It helps the investors to average the cost of investments made over a period, commonly referred to as ‘Rupee Cost Averaging.’  

Start Early

It is advisable to start planning for retirement at an early age. When one starts investing early, it allows more time for the investments to grow. For example, if one starts to invest at 30, they may have 30 years towards accumulating investment corpus. 

A monthly investment of Rs. 10,000 for 30 years may grow into the investment corpus of Rs. 2.28 crores (assuming the investments generate 10% annualised returns). In case one starts to invest at the age of 25, he/ she adds five more years into the investment journey, which may allow the corpus to compound further. Keeping all other assumptions, the same, the investment corpus may swell to Rs. 3.83 crores, an increase of Rs. 1.55 crores over five years. 

Invest in Growth Plans 

When planning to create a retirement portfolio, the returns must be reinvested into the investment corpus itself. It enables investors to reap the benefits of compounding over the long term. One may consider investing in growth plans instead of dividend plans to avoid the reinvestment risk. 

Regular distribution of dividends under dividend plans shifts the onus of reinvestment on the investors, while the same is taken care of by the fund managers in growth plans. Dividend income is also subject to tax deduction at source (TDS) at 10% (rate reduced to 7.5% for the remaining part of the year 2020-21 as a Covid-19 relief measure). Since one may not have specific cash flow needs during the investment period, investing in growth plans is a better investment option. 

Asset Allocation

Investors should have a balanced investment portfolio diversified across different asset classes, depending upon their risk appetite and investment horizon. Since retirement goals will tend to have a reasonably long investment horizon, one may have a higher allocation towards equities. 

However, as time progresses, the asset allocation should steadily shift from aggressive to conservative. This is because the risk appetite generally tends to reduce with age. 

Utilize the Systematic Transfer Plan (STP) to align with the Portfolio Risk Profile 

One should keep the portfolio aligned with his/ her risk appetite. As the retirement age nears, the investments should be shifted from high-risk assets to low-risk asset classes over time. One may switch such investments through a Systematic Transfer Plan (STP), which periodically moves the investments from one scheme to another. While one may be biased for changing investments at the right time, timing the investments and market movements is a challenging task. STP eliminates timing bias from the investing strategy. 

With mutual funds, one may aim to achieve their retirement goals effortlessly with regular investments and a wide range of schemes to align the risk profile and goals with the financial plans. 

Disclaimer: Above illustration is based on monthly SIP investment for various periods as mentioned above with an assumed annual rate of 10%. Rate of return considered is not an indication nor guarantee of returns.

The chart/information shared above is for illustrative purposes only and should not be construed as advise. The above is to illustrate the concept of asset allocation. There is also a possibility of the expected event not happening or some other unforeseen event that may affect the future performance of asset class. Investors are requested to note that there are various factors domestic and global that can have impact on performance of the asset class mentioned in the article. Information given is available in public domain.