Planning for life after retirement is one of the most important things any salaried person does. You take steps to make sure that you have the financial means to maintain your current lifestyle and enjoy the well-deserved freedom that retirement promises. But retirement brings its own challenges, they especially come in the form of healthcare costs and inflation, so often retirees have to dip into their savings to support themselves and their partners. Of course, no one wants to be a burden on their loved ones and you won’t want to depend on your children for money, so it’s very important to start planning for retirement as early as possible. After all, retirement should be a stress-free chapter in your life, where you get to focus on what truly matters. A key part of retirement planning is how you allocate your assets towards different specific options.
Asset Allocation simply means that you are distributing your investment portfolio among different kinds of asset classes, such as stocks, bonds, real estate, and cash equivalents. The point of this allocation is to optimise the balance between risk and return. For example, if you want to play a high-risk high reward game, you’ll allocate a higher percentage of funds to assets that promise a high return but also come with a warning label, such as equities. As an investor, one of your crucial decisions will be how you allocate your assets. Everyone is unique so there are no set rules about this, so it is based on your financial goals, risk tolerance, and the time you want to stay invested.
So without further ado, let’s list down the many benefits that Asset Allocation in Retirement Planning provides and how it can help you in building your retirement strategy.
A younger person is more likely to take risks compared to an old one. This is because when you’re younger you have more time to recover in case your investments don’t pan out, you’re more flexible when the dynamic of the market changes. An older person however does not possess this luxury. Their risk tolerance is likely to be lower because it’s harder for them to make back any money they lose in the market. If you are starting this journey as a young person, you can take advantage of the fact that time is on your side and aim for high-risk high-return opportunities. But if you’re starting late, then maybe a more conservative approach suits you.
Another thing that’s important is diversification. If you diversify your investments across different kinds of assets, you can protect yourself by reducing the impact of poor performance in any one sector on your overall portfolio. For example, when the market is volatile, the value of stocks may decline but assets such as bonds will likely remain stable. Know your risk appetite and the risks associated with the assets you want to invest in and ask yourself, “Is this the right asset for me? If so, what portion of my portfolio should I dedicate to this asset?”
This can get a bit confusing, in which case you can consider taking the help of Risk Management Services. These services can help you identify assets that align with the level of risk you want to take, and figure out their allocation in your portfolio.
Proper asset allocation can lead to enhanced returns on your investments. Different asset classes give different returns and have their own risk level associated with them. For example, while stocks provide higher returns than bonds, they are also riskier. In the long run, you will accumulate more wealth by investing smartly in stocks than in bonds. By allocating a portion of your retirement portfolio to stocks, you can benefit from the growth potential they offer. Usually, new companies that are growing or startups have a higher upside but also come with more risk. Now if you want to invest in debt related instruments such as government bonds, you won’t see a whole lot of growth, but your money will be secure.
All of this isn’t to say that if you’re young then you should only invest in high-risk high-reward assets or if you’re old you have to be completely conservative. The thing to understand is that there needs to be a balance in your portfolio. If you’re young, allocate more of your funds towards higher growth options, but a portion of it should also go into steady low-risk options. This is where an investment planner comes in. He or she can help you determine the right mix of assets that align with your retirement goals and risk profile, ultimately increasing the potential for higher returns over time.
From daily living costs to healthcare to leisure activities, you will have a lot of expenses to cover in retirement. Most of your cash will come from your accounts and your pension but you need to ensure that your funds are readily accessible when you need them. Asset allocation can help you meet your liquidity needs.
Let’s take an example: suppose you have allocated a large portion of your portfolio to real estate. It’s a good asset no doubt, it provides long-term growth and security but suppose unexpected expenses arise and now you need money as soon as possible. You will find it hard to liquidate your property fast and chances are even if you’re able to sell it quickly, your payout will be lower than your property’s value. Right asset allocation can help you avoid these situations. By keeping a good balance, you ensure that you can access funds as needed without compromising your long-term financial security.
By strategically allocating your assets you can reduce your tax liability, so asset allocation also plays a significant role in tax planning.
Different types of investments come with varying tax implications. You can make use of tax-advantaged accounts such as the Employees’ Provident Fund, or the Public Provident Fund. Under the Income Tax Act, these accounts offer tax benefits on both contributions and returns. On the other hand, the investments you make in accounts like regular fixed deposits or mutual funds are subject to taxation. So proper asset allocation can help you optimise your investments, which leads to reduced tax burdens allowing you to keep more of your money.
When you invest according to your goals it makes it easier for you to achieve them.
This is why goal planning is important. Set clear, achievable goals and set a timeframe before you start working on them. If you want to plan for a nice vacation with your family in the short term, you can start an SIP in liquid funds. In the mid term you might want to buy a house, in that case, you can look into a mix of stocks, bonds, and REITs. Planning for your retirement in the long term demands you diversify your portfolio across a range of assets to ensure your golden years are just as amazing as they are meant to be.
If you align your asset allocation with your goals, you can work towards realising all your financial dreams.
Also Read: Goal Planning Using SIP Calculator
It’s important to understand that planning for retirement is not something you should avoid. The sooner you start, the better it will be for you in the long term. What you should avoid however is making the mistake of putting all your eggs in one basket. Doing so can be very risky and unhealthy for your finances. With proper asset allocation in your retirement portfolio, you can enjoy the many benefits we discussed above. Also given the dynamic nature of the market, It’s also important to review and adjust your portfolio to make sure it remains aligned with your changing financial situation. A Financial Advisor can help you with this and guide you to a financially secure future.