The Retirement Gamble

 My retirement plan?  Well I plan to pray.  That may be the only way out.

Often folks in their 50s and 60s hope they hit the jackpot. Else retirement could be a a very stressful period. Will you have enough income to retire comfortably? 

I wish it was a simple question with a simple answer. As they approach retirement a lot of folks begin to play the game of roulette at the casino hoping for that one big break. Does the retirement planning process really need to depend on the roll of the dice? Based on my chats at social gatherings, most people in their 50s regret the way they planned for their retirement.  Almost all feel that they could have done a much better job in building a better corpus. But often the challenge also lies in the asset allocation and the inability to generate periodic income without the need for active management.

The first thing of course is to have an adequate size of a corpus to form the base for your retirement funding. While the active income during your earning years is an important element, the one thing that many fail to do is to start the planning process early. The magic of compounding is almost often elusive to the human mind. The impact of time in the process is often misunderstood or not understood enough. One of the moment important factor in the final result is time. Start early and let the investment grow over time. The magic begins to unfold from year 15 onward and truly feels like magic in year 25 of the process. Given the average retirement age of 60 years, being fully involved and committed to the process by the age of 30 is critical. Starting at the age of 25 gives a strong multiplier impact. 

Buy of Rent

The mix of assets as you draw closer to retirement is extremely important. The asset allocation process becomes even more important as one draws closer to retirement.  This is for 2 reasons.  Risk management and the need to generate income without active management.  

As the rule of thumb suggests, the share of lower risk assets should increase as one draws closer to retirement. As a person nearing retirement or as someone who has recently retirement, it is undesirable to be heavy in higher risk assets like equity.  It is important that one carefully realigns the asset allocation as one draws closer to retirement. Move more into lower risk assets.

The other factor and probably the less obvious is the ability to generate income without active management. Retirement is a well deserved period and one does not want to spend it in actively managing the assets.  As an example, while rent from an investment property is a good way to generate periodic income, do you really want to spend retirement in managing properties? Add to that the potential of litigation and maintenance. One needs to try and move assets across to classes that can generate income without having to actively management the income.

Do you have a good retirement plan in place?  Or are you banking hopes on God?

Check out this video about the magic of compounding