Guidance on building a retirement portfolio and ensuring financial security in retirement
Tuesday, Jul 9, 2024
The aging skin reminds us of our strength, which depreciates over time. It does make sense to think a bit of you in the future, where you wouldn't want to work but rather rest and experience life when it's unfolding in front of you.
Again, thinking of your finances securing you at that age is more calming than you securing your finances. Let's see how you can build a retirement portfolio now so that you are financially secure later in this article
Why do I retire?
The logic goes like this, you are mostly working when you are healthy, which implies you make enough money a year, even more the next year and so on.
If you spend what you make in the present, where is the money in the future when you aren't able to work?
Of course, like how we save a part of our earnings now to buy liabilities that keep our lives lively, we normally aren't interested in the assets that can build our future later.
So you need to save money for the asset that gives you a corpus to live on tomorrow, unless you believe your parents left you enough finances or your kids will see your future, that's a different story altogether.
Assuming, it's you who wants to build your future self the corpus you'd need, you are the one who needs to preserve your money for retirement.
The first step is to build a mindset of setting aside money, which is otherwise called savings, in your headspace. Now gradually shift that mindspace into reality by investing in assets that don't benefit from any sitting idle situation or peanut making returns but rather leverage solid return giving assets while you are aware of their risk to smartly handle them and make them achieve your expected goal.
If savings could make it all, you wouldn't be recommended for investing. Since it clearly doesn't win your goal, go by investing, which nearly doubles your investment every 10 years.
“Your final move to invest for retirement is solely for you and not for any materialistic liabilities that's non-existential. At least in an era where we hardly save or invest for ourselves, it's the right move. Likewise, do you know Shariah investments in India have a motive too?
The motive of socially responsible investing: Shariah funds in India. “
Leading us to a question: when to start?
“Early” is neither fancied nor stressed to make your present difficult but rather emphasized to release you sooner from workaholic stimulation and help you vibe for every small thing you love to do sooner than later. For which the reason of not having enough shouldn't stop you, therefore, early!
Maybe right from the month when you start earning or a scenario where you are free from debt obligations to begin with even a smaller contribution towards retirement.
Let's talk practically, If your sweet spot for retiring is at the age of 50 and you started earning at 21, you have a horizon of 50 - 21 = 29 years to grow your retirement corpus.
Which is nearly 39 years! It is quite important to decide how you go about building the retirement portfolio to meet the goal based on your current financial growth.
The next question: how do I build a portfolio?
You know how to build something when you know what to build, so do you know how much you want to retire?
How much depends on what you expect.
The lifestyle you desire when you are old is one major factor that brings up this amount. Inflation is another factor that needs to be considered to live the life based on the future value of the money and not the current.
This planning goes over deciding how long your life expectancy is. Well, if you have debt obligations, and child upbringing responsibilities, that's an additional concern and we can't miss out on medical expenses all the while.
Is there a definite number? No, but we can still do the guessing to arrive at an approximation calculatively using many rules that exist. We don't call anything ideal, as it's subjective to one's lifestyle.
You may decide on the one that most suits you and to list a few:
25x rule
The 4% rule
15% rule
80/2 rule
If you don't want to overcomplicate the approximation, use the retirement planning tool here to estimate.
Note: The income post retirement must be expected, including expenses, obligations, and emergencies.
Investments in the portfolio are the executors of the plan.
What's taking action is your investment. When your reliance on building a corpus is on investments, you also need to be careful when picking assets in your portfolio, take care of the allocation of each asset and construct your portfolio over time to work toward your goals.
You now know how long your capital investments need to stay invested; they will in fact give you returns post retirement besides your fixed withdrawals.
That leads to a question: on what to invest?
The most known asset allocation has been stock and bonds. You can choose stocks for long term positions and bonds for fixed income and short term positions.
Ideally, when you are young, you have greater susceptibility to taking risks, and the stock:bond allocation can begin at 60:40. In the later stages, it'll lean towards 40:60.
There are plenty of stocks but what to pick depends on your return expectation goal, and a lot more understanding of the type of stock itself.
For instance, for those who prefer dividend stocks, it means they need both fixed income and capital appreciation. Growth stocks, when rightly chosen, have a high potential for capital appreciation. When you pick a stock at the right price, there's much value in the capital gains as well.
Again, these stocks are seen in three capitalizations: small cap, mid cap, and large cap. Understanding the policies, sector growth, companies, returns, and current price valuation is altogether an intricate part of the investment.
Besides, if you have real estate investments, gold investments, or retirement scheme investments like NPS, EPF, or PPF, you can also consider their contribution to your retirement planning.
Which is ideally easy when you have a portfolio that's well thought out by experts and you don't need to do any research.
Besides, post retirement that is, at the age of 50, continuing the previous example, comfortably from all your investments, you should be able to at least withdraw 4% every year.
While the remainder of your portfolio is still in action to generate and compound, you don't want to overdraw and exhaust your capital for the remainder of your life.
You can't leave an engine ideal and expect it to work it through: it needs fuel.
Likewise, your investment needs rebalancing timely and you should also have a plan to take advantage of new opportunities.
If everything were to go straight, why are there potholes in between?
In worst case situations, when stocks are down, you know bonds are highly valued, you can book the appreciation and still hold on to stocks for recovery and purchase new stocks at a lower price.
If the stocks are at good momentum, rebalancing your portfolio by booking profits is a good choice to continue maintaining your asset allocation and not be exposed to too much risk.
Ultimately, making a corpus for retirement is important but not at the cost of good sleep (risk).
You need guidance to build exactly what you dream of.
Often, being confused about what's effective to grow your portfolio is something we understand and you need assistance to get there.
After all, it's the corpus for your retirement. We at GreenPortfolio offer specialized portfolio management services to keep your portfolio greener.
In the meantime, Shariah investments in India have gained popularity for their socially responsible way of investing.
If you desire to be a socially responsible investor, you must check out Shariah funds in India.
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