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Planning For RetirementBY: Vivek SHARMA | Category: Finance | Submitted: 2011-04-04 09:49:06
Planning for retirement is an integral and extremely important part of financial planning. Since in many countries, the government does not provide social security or assured retirements benefits to ensure a secured and smooth retirement life in terms of regular cash flows, financial planning becomes important for every individual. What should an individual do for retirement planning? Does it involve lots of effort and understanding of financial jargons? Can an individual himself do retirement planning or needs help of an expert to do retirement planning? Believe me retirement planning can be every individual without help of an expert.
What are the key aspects of retirement planning? Let us discuss key aspects one by one. The most important factor in successful retirement planning is to start early. Retirement planning should start the day you start earning. Don't wait for you to reach late 40s and then start retirement planning. The reason of starting early is that you get benefit of compounding. Suppose you invest $2000 for a period of 40 years and get 5% return p.a. After 40 years the value of investment will be $ 14080. However, if the same investment is done for 20 years, the amount remains $5307. Though the time span is half in second case, the maturity value of investment is around 1/3. This has happened because of power of compounding.
The second aspect of retirement planning is that one should invest at regular intervals. Investing every month or once a quarter makes sense. Regular investment helps you create a healthy corpus. If you invest regularly, you will be able to create corpus which can take care of inflation as the corpus will continue to grow and you won't be under pressure to invest in risky assets to beat inflation.
While making investment for retirement planning, never forget the golden rule,' don't put all eggs in one single basket'. This means diversify you portfolio which is useful in reducing portfolio risk. Asset allocation is extremely critical as the value of portfolio will depend upon the risk element in the portfolio. Always have a sizeable debt corpus in the portfolio which is meant to take care of retirement planning. High exposure to equity can make portfolio risky. Retirement portfolio should not have high tilt in favor of risky assets.
Last but not the least since retirement planning is for very long period, it is important to continuously review the portfolio and check if the portfolio can take care of retirement planning. If not, then churn your portfolio and change asset allocation.
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