Your Money: Steps to Reach Your Retirement Corpus Milestone

By Vishal Vij

Planning for retirement is all about having a glimpse of your “future” based on your current aspirations, wants and desires. Estimating your post-retirement activities will make your retirement plan much more meaningful. For example, you might want to travel a lot more, get involved in philanthropic activity, or want to ensure a buffer zone in an emergency. It would be best if you were motivated by your goals after retirement, quantified expenses to a rough number based on present value, and inflated expenses until you reach retirement age.

Someone needing Rs 2 lakh per month based on present value may need to budget 5.3 lakh per month after 20 years at 5% inflation rate. With an estimated life expectancy of 35 years, the required corpus would be Rs 13.7 crore with a real rate of return of 3% (return on investment – inflation) on the post-retirement corpus. If you don’t put the pillars in place to achieve this goal, it poses a huge risk to maintaining your current lifestyle after retirement.

Effective pension plan
In order to prepare an effective retirement plan, it is essential to have an optimal portfolio composition before and after retirement to get closer to the stage of your retirement corpus and to effectively monetize withdrawals later. Someone who has more years to retire can afford to take a much higher exposure to risky assets compared to someone who retires in a few years. Imagine all left to risk assets for “long term” without portfolio rebalancing and in the year of retirement, the market collapses by 30%.

This removes almost a third of your wallet during this phase where you had to initiate withdrawals from the corpus. Following a diversely correlated fund asset allocation plan and rebalancing at regular intervals reduces these risks. Historically, equity mutual funds have proven to be very effective components of your investment.

Plan for the unexpected
Being prepared for contingencies is the essence of any financial plan, especially your retirement. The only thing that can create a big hole in your nest egg is unexpected medical expenses. Making sure your medical insurance covers you during retirement is essential to protecting your retirement corpus from sudden exhaustion. Mutual funds can be used to cover unforeseen expenses.

Investment portfolios are built to meet multiple objectives throughout the lifecycle. To ensure that you have optimal funds for each goal and that you are saving enough for your retirement, risk and return must be managed effectively. Effective portfolios are those that can meet multiple lifecycle goals with a continuous flow of capital, in and out.

The writer is founder and CEO, Nestegg