Table of Contents
Introduction
A reader recently shared his retirement setup with me. He’s 42, with 50 lakhs saved up, split between demat and EPF/NPS.
His investments include dividend mutual funds, liquid funds, and Nifty index funds.
He has no debts, and he lives in a flat whose home loan is already paid off.
He has steady savings from his IT job.
He aims to build a 1 to 1.5 crore corpus by the time he is 50. His main worry is market dips.
His wife also adds to the retirement picture, with her EPF/PPF and a pension from her government job.
He’s simplifying life by decluttering.
As I could decode from his email, his plan leans on dividends for income. He wants to avoid liquidating his accumulated corpus (principal) at all costs. Hence, his focus is to build a corpus so big that his dividend income from it will be enough.
Alternatives like 60% equity and 40% debt are on his mind, plus long-term health insurance.
After studying his portfolio, I see common threads. Compounding is key for him but there are some risks as well.
I’ll share my views in this blog post.
1. Understanding the Current Setup
This reader’s mix shows thought. He is not someone who is blindly accumulating assets. He actions are measured and goal-based.
- Dividend-focused funds aim for regular payouts, which feels safe.
- Index funds track markets broadly, keeping costs low.
- Liquid funds offer quick access for emergencies, a smart buffer.
- Gold adds a hedge against inflation, a fair choice for risk diversification.
As he already owns a flat (self-accommodation) whose home loan is already paid for, one big burden is already off his shoulders. It is a big plus. How? He has no rent or EMI expenses.
But what’s a bit concerning is his excessive reliance (mindset) on equity for dividend income.
We must always remember that till the market behaves as expected, it looks like the best bet. But often, the market’s volatility is very unpredictable.
We must factor in this “unpredictability” aspect of equity and plan accordingly.
So, let’s know more about the equity and dividend aspect of an investment portfolio.
2. Pros of a Dividend-Heavy Approach
One big plus is getting income from dividends without selling your investments. This strategy suits retirees well. They can use the dividend income for daily needs.
Old family support systems are not as strong as they used to be say 2 decades back. So, retirees but think ahead and plan accordingly.
Regular dividend payments can help them pay for essentials like groceries or utility bills without being dependent on anyone else. It’s a reliable stream on which one can depend on.
Mutual funds that chase high dividends often choose solid, stable companies. This cuts down on some risks and worries for investors.
But remember, dividends are not always sure (their yield can vary). Companies might reduce or stop them during hard times. We saw this after the pandemic hit.
Taxes can also take a bite out of your returns. It can reduce your overall returns. Why? Since dividends are added to your total income and taxed according to your regular slab rates. High dividend earner will have to face the impact of TDS.
Over many years, this approach (net of taxes) might give lower total returns than growth-focused ones.
There will less money left in your hands hence compounding will become slower.
So, ask yourself: Do you value steady income now more than bigger growth later?
3. Let’s Compare The Classic 60/40 Mix
This means putting 60% of your money in equities and 40% in debt. It’s a setup that’s been used for years.
Many investors swear by it because it has stood the test of time.
Equities are the growth engine here. They help your investments grow over the long run. Think of them as the part that aims for higher returns.
Debt, on the other hand, brings stability. It acts like a safety net during rough patches.
In India, lifespans are increasing these days. People are living well into their 80s or beyond.
This means your retirement savings must stretch further. The 60/40 mix helps protect against sharp market drops. It keeps things from falling apart too badly.
Studies confirm this approach works well. They highlight how it strikes a nice balance between taking risks and earning rewards. This is especially true for folks in their mid-40s who are planning ahead for retirement.
Debt investments like fixed deposits or bonds are predictable. You get a steady yield without big surprises. That’s different from stocks, which can be very volatile. One year up, next year down or low returns.
It makes sense to shift more towards debt as you age. At 42, you might afford higher equities. You’re still in your prime and can take some aggression. But as you get closer to 50, it’s time to reassess.
Imagine a market downturn right before you retire. That could wipe out gains quickly. You don’t want to be caught off guard. Planning ahead avoids such stress.
Use of hybrid funds can further simplify this.
They combine equities and debt in one package. No need to manage separate parts yourself. It’s easier for everyday investors like us.
Ultimately, the goal is peace of mind. You want to feel secure about your future.
4. Role of Gold and Safe Havens
Gold plays a smart role in many investment portfolios. It helps fight against the rupee getting weaker over time. When the currency loses value, gold prices often rise in rupees.
This keeps our wealth protected.
Gold also acts as a shield during global troubles. During economic crises (like that of 2008-09) or geopolitical tensions (like the Russia-Ukraine war), investors turn to gold as a safe haven.
Gold holds its value better than many other assets.
You don’t need to buy physical gold bars or coins.
There are easier ways like ETFs. These are exchange-traded funds that track gold prices. You invest in them through your demat account. No need to worry about storing or securing the metal.
Another option is Sovereign Gold Bonds, or SGBs. Issued by the government through the RBI. Though I personally prefer gold ETFs over SGB.
It is always better not to go overboard with gold. Keep it limited in your portfolio.
Experts often suggest 5-10% allocation, not more.
If you put too much, your money gets tied up. Gold doesn’t grow as fast as stocks over long periods. It shines in tough times but lags in booming markets.
Liquid funds fit well as safe havens, too.
They invest in short-term debt like treasury bills. You get easy access to your cash when needed. Returns are modest but steady and safe. No big ups and downs like stocks.
In retirement planning, aim for 5-10% in gold and similar safe assets (like liquid funds).
This setup prevents you from selling other investments during market crashes. You avoid losses from forced sales at low prices.
I treat my lot of gold and liquid funds as my family’s emergency fund. It is always there when things get rough.
5. Long-Term Health Cover is an Essential Part of Retirement Planning
Health expenses often shoot up as we grow older. Surgeries, medicines, or long stays in hospitals build costs in that age.
These can add up quickly and eat into our savings.
In India, the public healthcare system is under a lot of pressure. Hospitals are crowded, and waiting times can be long. Private care gives better service. But this is also true that they are relatively expensive. Without proper insurance cover, one big illness could wipe out what we’ve saved over years.
Long-term health insurance plans help here. You can also decide to pay the premium for 2 or 3 years in one go and get a reasonable discount.
They cover things like hospital stays, treatments for ongoing diseases, and even care at home. You don’t renew every year, which also saves hassle.
Starting such a plan now is smart. Premiums are lower when you’re younger. As age goes up, so do the costs.
Locking in early keeps payments affordable for longer.
When picking a plan, check for extras. Look for no-claim bonuses that cut future premiums if you don’t claim. Wide hospital networks mean easier cashless treatment. Add riders for serious illnesses like cancer or heart issues.
Conclusion
Personal finance is very dynamic, especially when we are planning wealth building for retirement.
Markets go wild sometimes. Health issues pop up without warning. But sticking to good habits pulls you through.
What is the key takeaway that I’ve learnt from my experience? Stay flexible when it comes to the needs of life.
As your needs change or markets move, adjust your plans. Don’t chase perfect setups. Always aim for ones that bend without breaking.
Retirement isn’t about flawless strategies. It’s built on toughness. Face changes head-on, and you’ll handle whatever comes.
Always build safety nets in your portfolio. Keep things balanced so that if any risks creep in, you have the resources to manage them well.
Have a happy investing.
