It’s never too late to save for retirement

You can create a retirement portfolio even if circumstances force you to start late

Consider this. You are 50 years old and have been saving so far to repay your mortgage and fund your child’s college education. You have just started to save for your retirement that is 10 years away. What should you do? A portfolio with large equity exposure can be too risky, whereas one with large bond exposure cannot accumulate enough wealth in a short time. In this article, we discuss how to create and manage a retirement portfolio when circumstances force you to start late.

Prioritise goals

You will have three major expenses post-retirement — living, leisure and healthcare. Given the short time to save for your retirement, you must focus on accumulating enough wealth to fund your living expenses. This portfolio should contain a bank RD and a systematic investment plan (SIP) in an equity mutual fund. Your allocation to equity must be not more than 40 per cent, which must be reduced to about 30 per cent after you turn 55. The amount this portfolio must accumulate when you turn 60 must be enough to fetch a monthly interest to sustain your post-retirement living expenses.

To easily arrive at an estimate of the amount you need to accumulate in this portfolio, inflate your current living expenses based on your life expectancy. Suppose your life expectancy is 85 and your current living expense is ₹1 lakh.

Then, your living expenses for 35 more years (you are 50 today) — maintaining your current standard of living with an inflation of, say, 5 per cent — will be ₹5.5 lakh. Assuming you can earn a post-tax interest at 3.5 per cent, you need ₹1.6 crore in your living expenses portfolio. You must also have another portfolio to meet your post-retirement leisure expenses. This portfolio can have an equity allocation of 40-50 per cent and the rest in bank RDs. You also have to top-up your health insurance so that you are adequately covered.

Given the short time to save for your retirement, there is a strong possibility that you may not be able to accumulate the desired wealth at retirement. What should you do when you retire?

You should first convert your living expenses portfolio into monthly income bank deposits.

If you face a shortfall in your living expenses, you can transfer capital from your leisure expenses portfolio.

Alternatively, if you live in your own house that is mortgage-free, you can, if possible, get reverse mortgage to fund the shortfall in your living expenses.

You must understand the costs associated with a reverse mortgage including the possibility that your house may not be part of any inheritance you may leave for your children.

What about your leisure portfolio? You could continue carrying the portfolio into your retirement if your major vacation spending is likely to happen after you turn 65. Otherwise, you have to convert the amount in this portfolio into fixed deposits at age 60. Note that you will consume the entire fixed deposits for your vacation spending, unlike monthly income deposits where you consume only the income.

We now turn to your healthcare portfolio. You would have created this portfolio during your working life.

This portfolio contains your contingency fund, healthcare insurance and some equity investments. You have to maintain the same portfolio with a significant increase in your healthcare coverage.

Finally, based on what we gathered from those who started late on their retirement savings, you will not regret as much as you think you will, even if you face a shortfall at retirement. That said, make the last 10 years of your working life count for your retirement.

The writer is founder of Navera Consulting.

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