3 important aspects of retirement planning
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- 2 of 4Risk of wealth shortfallAs simple as the words are, this situation refers to a situation where one fails to accumilate enough wealth that may be needed for the retirement period. The main reason for a situation arriving is due to the 'drain' in the investment portfolio over time. This means the main portfolio, which is yielding a certian pattern of return over time, fails to do so during a particular span of time. Eg: A particular portfolio generates around 15% returns for 10 years, but over the latest 10 year period, is generating loss of almost 10%. This means that the actual yield is just 1% or simply 0% in returns.
- 3 of 4Risk of LongevityThis risk simply refers to the risk of outliving one's investments in retirement, or in other words, simply running out of retirement wealth while being still alive. For eg: You have Rs 10 crore in your retirement income portfolio and you suffer a loss of 15% in one year and gain 15% in the next year. Further suppose you withdraw Rs 5 lakh each year for your lifestyle requirements. Your portfolio will be down by Rs 33.25 lakh by the end of the second year. Instead, suppose your portfolio gains 15% in first year and loses 15% the next year. Adjusting for the withdrawal of Rs 5 lakh in both years, your portfolio will be down by only Rs 31.75 lakh. Clearly, it matters which comes first, losses or gains. This is because you withdraw money from your portfolio every year.The way to minimise the risk is preparing an emergency fund, which should be around 12 times the value of the average lifestyle expenditure. This will help adjust for inflation, as well cover when the retirement fund otherwise runs out. Investing in periodic annualties ensure regular returns with decent degree of safety.
- 4 of 4Cost variation wealth drainWhen one is working, the objective of investments should be such as the cost of building up the portfolio should me made in such a way, that the risk of running short of funds or incurring higher expenditure during retirement, is minimised. In other words, the objective should be to take the maximum risks during one's active working life, so that during retirement, one sits on a decent corpus with minimal risk of wealth drain or lower than forecasted returns.
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