In this column dated June 2, 2013, we discussed about how you should motivate yourself to save for retirement. One suggestion we offered was to break your long-term retirement goal into several short-term goals. In this article, we discuss about how you can create such short-term goals. We call this approach as oblique strategy, because the portfolio is tilted towards one asset during each stage of your working life.
Oblique strategy
It is easier to save and invest if you keep your goal in mind. And your goal during your working life is to accumulate money to spend during your retired years when your active income stops. In keeping with the spirit of mapping investments with expenses, the oblique strategy works as follows:
First, break-down your post-retirement expenses into four categories- medical, leisure, living expenses and gifting. Then, estimate how much money you want to accumulate at retirement for each category of expense. Remember, this is only an estimate. So, you do not have to be precise in your calculation. Your objective is to accumulate wealth at retirement to meet these expenses in your retired years.
Second, map various assets to these expenses. You should map equity investments to the estimated medical and living expenses, bonds investments to estimated leisure expenses and gold investments to estimated gifting.
Third, break your working life into three stages. Stage one is between 25 and 35. Stage two is between 35 and 50 and stage three is between 50 and 60.
Fourth, because equity is risky and because you can assume risk in your early career, you should concentrate on building your retirement portfolio with equity during stage one. This means your first short-term goal will be to build wealth to meet living and medical expenses for post-retirement needs. Your objective would be to carry the equity investments mapped to medical expenses till you are 65. You can gradually shift towards bank fixed deposits as you near 70. On the other hand, the equity investment mapped for your living expenses should be substantially reduced when you are within 10 years of your retirement. At that time, you should either prefer to use the wealth accumulated through your equity investment to buy immediate annuity or gradually move into bank fixed deposits.
Fifth, stage two is when you can invest in real estate using mortgage that you should close before you retire. This real estate investment can fetch you rental income to supplement your living expenses in your retired years. Or you can invest in a bungalow that you can later convert into apartments fetching rental income. During stage two, you should continue to build wealth with your equity portfolio.
Sixth, also called the retirement risk zone, the last stage of your working life is when you should increase your investments in bank fixed deposits. This is also the time to concentrate on building wealth to spend on leisure activity- expenses that you will incur immediately after retirement.
Seventh, gold forms part of gifting in both your working and your retired years. Therefore, you can invest in gold during all stages of your life. Remember, however, to have not more than 10 per cent of your total investments in gold.
Conclusion
You should slice your retirement goal into smaller short-term goals. Remember this, if nothing else: You will have to concentrate on an expense-goal during each of the three stages of your working life. This does not mean that you will only invest in one asset class at each stage. It, does, however, mean that one asset class will dominate your portfolio during each stage- equity in stage one, real estate in stage two and bonds in stage three. The oblique strategy should offer you a more focused approach to save for your retirement.
(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to knowledge@thehindu.co.in )