Dont be too conservative while investing for retirement

There were days not too far back when mostly people lived in joint families. The surrounding social community too was very supportive of one another. But life has changed beyond recognition now. We hardly know our own neighbours. While friends are for weekends and vacations, relatives are only for social media or mobile messaging platforms. It is in such situations that governments play a role with their social security system. In case of financial difficulty or lack of family support, the government takes the responsibility of providing the basic necessities of a person.
Unfortunately, India lacks a universal social security system. Existing systems are based on employee-employer contribution models. According to the Towers Watson Report (2013-14), as much as 78% of employees nearing retirement say that the employer-provided plan is their primary retirement savings tool.

What is the implication for you?

All this makes it important to increase voluntary savings to fund retirement. Once you stop earning, you have no meaningful or dependable support to manage your living. If you do not have adequate resources to support yourself, you are at the mercy of others. The government is not in a position to extend a protective umbrella to you apart from the basic healthcare, which anyway is not of expected quality. The available old age pension schemes are very restrictive in their coverage and give out a meagre benefit compared to today's cost of living.

So what should you do?

You have no option but to work towards self-sufficiency in old age. You need to start planning immediately and build a corpus large enough to support your lifetime. You need to create your own social security net with your savings. Save adequately for the expected and unexpected expenses and invest wisely to create wealth over your working life.

There are three things you should consider

Don't invest too conservatively. The cost of investing too conservatively may be very large, especially in the long run as in the case of retirement. For instance, Rs 5,000 invested every month over the next 30 years (a total savings of Rs 18 lakh) would become just Rs 61 lakh, if invested at 7%. The same amount would become Rs 3.46 crore, if invested at 15%.
It may be prudent to consider taking some equity exposure in order to enhance your returns. It is highly advised to consult your financial advisor before investing in equities to get professional advice on how much risk you can tolerate.

Your age while investing

The younger you are, the longer the time you have before your retirement. And therefore, you could assume a higher risk in generating higher returns. Ideally, you should consider having a higher equity allocation. A rough thumb rule states that 100 minus your age should be the ideal equity exposure. That is, if your age is 30, your equity exposure should ideally be 100 minus 30 = 70%. As you approach retirement, the equity exposure should sequentially come down.

Your asset allocation post-retirement

While your earnings would have completely stopped when you have retired, and your risk appetite would have substantially reduced, it may not be wise to keep your investments completely conservative even post-retirement. Remember that you have a long way to go, even after retirement. It is important to ensure that your retirement corpus does not erode due to inflation during your post-retirement years. Therefore, a marginal allocation, like say 20%, to equity exposure should be considered even for the post-retirement years.

The writer is deputy CEO of Reliance Capital Asset Management