Retirement will be a reality someday for all of us. Regular earnings will stop, but the expenses won't. To ensure a comfortable and financially secure retirement, one must plan strategically and make wise investment choices. Traditionally, fixed-income options have been the go-to choice for retirement planning.
The Decline of Fixed Income Options:
In the past, fixed deposits and government-backed savings schemes offered high single-digit or early double-digit returns. Earning 10%-12% annually on secure bank deposits, savings certificates, or the Public Provident Fund (PPF) seemed like a secure path to building a retirement corpus. Sadly, times have changed, and the returns from such options have mere 5%-7% per year (pre-tax).
Moreover, our economy's annual inflation hovers in the same range, which means that the real return you are left with is practically negligible. The value of your money doesn't grow significantly when invested in low-return assets.
The Need to Diversify with Equities:
As the retirement age remains steady at 60-65 years retirement depend on a fixed income, life expectancy has been increasing. This means that you could potentially spend another 20-25 years in a no-income retirement zone. Relying solely on fixed-return investments may lead to a disappointing situation where your savings do not keep up with inflation, leaving you struggling to cover basic expenses, let alone fulfilling your life's desires.
In this evolving economic landscape, it becomes crucial to diversify your retirement portfolio. One of the key alternatives that can potentially offer a solution is equity investment.
Equities for Retirement Planning:
Equities, or stocks, represent ownership in a company and are traded on the stock market. While they come with higher volatility than fixed-income options, they have historically delivered superior returns over the long term. In a growing economy like India, equities hold the potential to outpace inflation and provide better tax efficiency, ultimately enhancing your retirement savings.
It's important to note that investing in equities does carry risks, but those risks can be managed through proper diversification and a long-term approach. The key is to hold a balanced and diversified portfolio that aligns with your risk tolerance and retirement goals.
Moreover, with the emergence of mutual funds and exchange-traded funds (ETFs), investing in equities has become more accessible and convenient for retail investors. These investment vehicles pool funds from various investors to invest in a diversified portfolio of stocks, mitigating the risk associated with investing in individual companies.
The Power of Compounding:
One of the most potent tools in retirement investing is compounding. By reinvesting dividends and capital gains, your investment can grow exponentially over time. This can significantly boost your retirement corpus, especially when you have a long investment horizon.
The Key to a Wealthy Retirement, Before and After.
Long-term equity investing holds the key to a fulfilling retirement, allowing you to maintain your desired lifestyle and cater to non-essential wants post-retirement. But the question arises - how should you structure your investment portfolio? Before retiring, substantial exposure to equity, at least two years prior to retirement, can prove beneficial.
Even after retirement, if you have a pension income to rely on, having more than half of your investment pool allocated to equity can be a prudent choice. In case your pension alone isn't sufficient, you can utilize your accumulated equity investments through a systematic withdrawal plan, complementing any other annuity income you may be receiving. Equity investments possess the potential to deliver returns that outpace inflation, and their power of compounding can help in building substantial wealth over ten to fifteen years.
As your wealth grows, approaching retirement or already retired, you can mitigate risk by gradually shifting an appropriate amount into debt investments. However, it's essential to retain some equity exposure, allowing your wealth to continue growing for the next two decades and beyond.
While debt investments provide security and stability during retirement, equity remains indispensable as a wealth creator asset. Striking the right balance between debt and equity is vital, ensuring that even in your post-retirement years, you do not overlook the potential of equity to grow your wealth.