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Retire on equity

Despite higher risk, the returns from equities are much more than those from safer options, such as savings accounts, certificates of deposits or bonds.

  • September 23, 2010  
  • |  
  • UPDATED   00:00 IST

Gone are the days when investing in equity was considered as risky as gambling. Today, equity is bound to top the list of long-term investment options for many. While markets do offer opportunities to earn quick returns, the risk-reward ratio is more favourable over the long term.

The equity approach to retirement
A retirement investment plan must take into consideration the one constant in any stock market-risk, and the uncertainty it brings to the plan. Understanding that risk propels the return on investment in the stock market beyond that of savings accounts, certificates of deposits or bonds, is a start.

Equity Allocation for Different Risk Profiles
AGE (YRS)
CONSERVATIVE (%)
MODERATE (%)
AGGRESSIVE (%)
18-30
50
70
90
31-40
40
60
80
41-50
30
50
70
51-60
15
35
55
61-70
0
20
40
71+
0
5
25

The key would be to use the risk-return balance of the equity market to your advantage. For a retirement plan, one can invest a lump sum when the market falls or start buying a certain number of stocks every month. A retirement plan should be founded on the understanding that you can't retire successfully without financial freedom. Therefore, its main objective would be to ensure a steady income during your sunset years. You must also account for inflation in the

calculations. This income should be separate from the principal amount invested to form the corpus. The return on investment for such a plan should be used to provide a steady income, which you would need after you stop earning a salary. The income from these holdings should go up every week until retirement, irrespective of the price of the security, at any given phase in the market.

You must have a certain assurance about the plan that you trust will generate your retirement corpus. You must also implement and continue with the plan. This ensures that you benefit from planning. A no-fee plan enhances the return, allowing every rupee to work for you. The companies in your portfolio should have a record of raising dividend every year. This is to ensure a dividend increase for the 10th or the 35th consecutive year. The objectives of a portfolio are expressed in terms of risk and return.

For retirement investments to be successful in the stock market, some calculated assumptions need to be made. A retirement plan begun at the age of 30 for a retirement age of 50 should have an allocation that is fixed when it comes to investing directly in equities. More than 50% of the allocation must go into direct equity and at least 50% of it must be in large-cap companies. The above table (Equity Allocation for Different Risk Profiles) will give an idea of the aggressiveness one must maintain to accrue a good retirement corpus. A moderate risk profile enables you to have an equity investment even after the age of 71.