Notebook of a Share Trader

Financial Planning for Retirement and Live in Style

We human beings, need to think and plan ahead. While that may be true, most of us also have great trouble thinking ahead for the long term in the middle of our daily busy tasks. It’s difficult enough to plan something just six months ahead,like a summer vacation. How are we supposed to be able to think about something in the distant future like retirement?

However, thinking in advance, and acting on those thoughts, are keys to being ready when the future becomes the present. The younger you are, the more distant your retirement and the greater your ability to compound your returns over time.

In this connection, we try to answer the important questions:

• When should I start investing?
• How much money will I need for my retirement in order to live comfortably?
• What are my goals to achieve before retirement?
• Where should I invest to get maximum return and manage my risk on investment?
• How much can I get as pension or social security?
• What costs might I run into once I’ve actually retired to maintain my standard of living?

We all have to answer the above question and clear our thoughts, our future vision for retirement planning. As you know early you start savings, more years to retire and the greater your ability to compound returns over time.

Generally, to calculate future prediction of expenses, inflation rates are added to the expenses- you are spending now. Say, your expenses are Rs. 10,000 for now, (Calculating inflation of 7% as per Indian inflation rate) you need Rs.19,670 to maintain your purchasing power after span of 10 years.

Asset Allocation Rules for Retirement Planning

When it comes to asset allocation for your future -long term planning for retirement, the biggest decisions come down to how much you should have in cash, how much in bonds, how much on property, how much on gold and how much in stocks.These rules of allocation will help you slice up your portfolio into these important pieces.

Rule 1

If you need the money in the next year, it should be in cash or one year bank deposit. You don’t want the down payment for your vacation or emergency funds to evaporate in a stock market or get it fixed for long time. Keep it in a money

market or savings account. If you’re looking for the best yield.

Rule 2

If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as RBI bonds, bank deposits (CDs), keep on a small part (10%) of investment in mutual funds. Whether it’s your kid’s college money or the retirement income you’ll need in the not so distant future, stay away from stocks.

You have to look around or consult your financial adviser to get maximum return safely on your investments -making sure he is not just making you invested merely for his commissions. As with all investments, risk and reward go hand-in-hand when it comes to “safe” assets. So, in order of “safest” to “still safe but technically riskier,” we have Treasury notes (RBI Bonds) it’s also the order of lowest- to highest-yielding. Deposits with National banks (CDs) are still very safe, can usually be bought commission-free, and you should be able to find some that pay a percentage point above Treasuries bond. Shop around for the best rates; your local bank may not be the best-yielding option.

Rule 3

Any money you don’t need for more than five to seven years is a candidate for the stock market. However, investors in stocks have to keep that “long run” part in mind, since in the short run, no one knows what stocks will do. Make no mistake -Even if you’re in or near retirement, a portion of your money should be invested for the long term. That’s because, according survey, a 55-year-old can expect to live another 25 years and a 65-year-old has another two decades. The average 75 year-old lives into their late 80s. A 110-year-old, however, should sell everything and get to casino if he/she still can.

Rule 4

Always own stocks, real-estate and gold. Over the long term, equities and Indian real-estate has been proved and they are the best vehicles to ensure your portfolio withstands inflation and your retirement spending. Stocks are more preferred because they are highly liquid than real-estate.

Check out the history and growth in stock value in last 30 years. Stocks and real estate prices beat bonds and bank deposit in the Long Run. stocks have always beat inflation, a claim of interest rates can not make.

Overall, when you need your money -it depends on where you put it. What else determines your asset allocation? That favorite term is your tolerance for risk.

Risk determines Return

Most people base their investment strategies on the returns they want. Instead, focus on managing risk and accept the returns that go along with your tolerance for it. It’d be great if we could get good returns with no risk at all. But to achieve returns beyond a minimal level, we have to invest in things that involve some possibilities to lose money.

First, you’ve identified just how you feel about risk. You are well on your way to choosing a portfolio that will maximize your returns to your comfort level.

Ask yourself a question -What would you do if your portfolio dropped 10%, 20%, or 50% from its current level? Would it change your lifestyle? If you’re

retired, can you rely on other resources such as Social Security or pensions, or would you have to go back to work and how would you feel about that? Have you been able to hold your stocks or did you panic and sell?

That’s the test of an investor’s risk tolerance -an ability of bearing risk. How a investor cling to those shares as they become worth less and less, while hoping that they will one day be worth more and more. How you answer those questions will lead you to your risk tolerance. The higher the fear for portfolio ups and downs, the more your portfolio should be in bonds (fixed interest return).

Consider the following table, The Intelligent Asset Allocator.

I can tolerate losing ____ % of           Recommended % of portfolio

my portfolio in the course of                      invested in stocks

earning higher returns

35%                                                       80%

30%                                                       70%

25%                                                       60%

20%                                                       50%

15%                                                       40%

10%                                                       30%

5%                                                        20%

0%                                                        10%

So, according to table, if you can’t stand seeing your portfolio drop 20% in value, then no more than 50% of your money should be in stocks. Sounds like a very good guideline to us.

Now you know how much you should have in stocks. But what kind of stocks you need in your portfolio?

Stay with us for update. Get RSS feed.

You’ll also like to read :

Trading Rules

Technical Analysis

.

Copyright © 2012 Notebook of a Share Trader. Entries (RSS). Clean Simple White Theme by Mazznoer. Powered by WordPress.