If you cannot take responsibility for your finances, nobody else will. Of course, you can hire an adviser to help you meet your spending and investment objectives. But you are responsible for eventually working towards achieving your life goals; your adviser can at best facilitate your decision-making process. So, how should you take your decisions?

In this article, we discuss how you can use simple rules to self-manage your retirement portfolio.

Retirement rules First, decide your retirement savings rate. A disciplined approach to savings is arguably more important than choosing the “right” investment product.

If you are in your early or mid-career, your savings rate would be typically 15-20 per cent of your monthly income, assuming you spend 40 per cent on living expenses and 40 per cent on repaying your home loan. Earmark at least half your monthly savings for retirement, unless you have to meet other high-priority life goals.

You should also increase your retirement savings each year by earmarking an additional 5 per cent of your annual salary raise.

Second, shift your frame of reference from pure investment returns to your consumption needs after you retire. This will lead to two behavioural changes.

One, you will gradually appreciate the importance of stable cash flow products, such as life-time annuity and average-return products like index funds to meet your retirement goals. And, two, it is easier to achieve your goals when you earmark funds for specific expenses.

Map investments That is, rather than investing to simply accumulate wealth in your retirement account, invest to have cash during your retired years to meet each of the three spending needs or buckets — health care, living and leisure expenses. Such mapping of investments to expense buckets also helps you observe whether you are on course to achieving your retirement goals.

Third, protect your investments from unrealised gains. It takes little effort to lose, say, 25 per cent unrealised gains and more effort to recover 25 per cent unrealised losses in your portfolio. So, what should you do?

Calculate the minimum return you would require on your investments to achieve your retirement goals. Suppose you require 11 per cent annualised return. Transfer returns in excess of 11 per cent in any year to short-term bank fixed deposits. Re-transfer this amount to equity index funds in years when your investment returns are less than 11 per cent to cushion the shortfall in required returns.

Fourth, use the National Pension System (NPS) as your default retirement savings if you face difficulty in self-managing your retirement portfolio.

The NPS architecture makes it easy for you to accumulate retirement wealth and also moderate the longevity risk during your retired years.

How? You cannot easily withdraw the amount in your Tier I account till you reach 60. This lack of liquidity prevents you from using your retirement money to meet intermediate life goals.

Also, a portion of your Tier I account will be compulsorily converted into annuity at 60. This offers stable cash flows for life. These benefits may not be available at low cost if you invest in mutual funds or insurance products offering retirement solutions.

Keep it simple Saving for retirement is an important life goal. You should, therefore, follow a two-fold strategy to achieve this goal. One, your retirement savings process should be simple so that it does not take much of your leisure time — time that you can otherwise spend with your family and friends.

And two, you should be able to make your own investment decisions. The objective is not about taking control over your investments but about taking responsibility for your finances. For, with responsibility comes the urge to achieve one of your most important life goals — retiring rich.

The author is the founder of Navera Consulting. Feedback may be sent to >porfolioideas@thehindu.co.in

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