How To ‘Pay Yourself Today’ In Retirement

For most people, retirement savings is a conundrum caught inside the confines of an age-old dictum, “too little, too late”. I can delve deeper into the causes that have spawned it, both social and economic, but I will skip all the mushy aspects and go straight to what may be called a working solution.

The solution I have in mind revolves around a central theme, which you must have come across in other contexts many times on earlier occasions. The theme I allude to today can be best expressed in three words: Pay yourself today (PYT).

Indeed, PYT will make your retirement plan work more efficiently, acting just like the lubricant that an engine requires on a regular basis in order to propel a dynamo. 

How you may utilise PYT to your own advantage will be discussed in subsequent paragraphs. For the time being, let me just refer to a view that has gained ground over the past decade or so – it draws strength from the fact that PYT is the sheer foundation upon which an entire retirement plan can successfully stand.

Here’s how

PYT is characterised by various allocations that need to be worked out in advance, well before items of expenses are dealt with. In a typical set-up, an investor needs to automatically direct a part of his revenue (normally recorded once a month) to various asset classes, courtesy of managed products such as mutual funds. 

Of course, this exercise has to be repeated regularly over a reasonable stretch of time. The investor concerned needs to step up his allocation with the passage of time, especially so in order to keep up with the inflationary trends of the day. In many cases, such an allocation tactic can be perfected with the aid of Systematic Investment Plans (SIPs).

The latter, as you will no doubt know, is all about marking a predetermined part of your surplus, and sending it to a designated asset manager on a certain specific day. The average individual may well have several SIPs running simultaneously; there is a far greater general awareness of SIPs’ wealth-building capacity today than before. I think the retail investor’s affinity for SIPs will only escalate in the days to come.

Let us, at this juncture, consider a salary-earner, Mrs X, who allocates Rs 50,000 every month for her SIPs in five mutual funds. Let us, for the sake of convenience, assume that her “slices” are all uniform, each of them fixed at the very beginning at Rs 10,000.

Now, at the end of each year, the intrepid Mrs X accumulates Rs 1.20 lakh in each fund (Rs 10,000 x 12 months), amounting to Rs 6,00,000 in all (Rs 1.20 lakh x 5). Now, over a period of ten years – a decade sounds good in the context of equity – she will collect Rs 60 lakhs. If you assume a simple accretion of, say, 10 per cent per annum, just imagine its impact on this individual’s kitty.

Key tenets

Now, if you are as plucky as Mrs X, here is what you will ensure in order to energise your PYT programme:

1. You will not break or interrupt or cease your SIP regimen unless such a measure becomes absolutely necessary, perhaps in keeping with an unexpected and enormous change in your risk profile

2. Whenever possible you will increase your allocation in a strategic manner. Such a step will aim at taking advantage of marked declines in security prices.

3. Your PYT, despite all pointers to the contrary, is not iron-clad as rebalancing may well be warranted. Re-balancing of assets, which I wish to deal with at a later day and save for another column in the context of retirement, is a crucial exercise. The latter has to be done expertly, as expertly as a surgeon who operates a critical patient.

4.  You will need to review your status once in a while – actually, a mere casual once-a-year approach is not recommended in this day and age. What has been your accumulation so far? How has the accumulated kitty performed? Where can improvements take place? These are questions that need to be answered every now and then. You, and only you, will be able to address these issues with grace and efficiency.

    

   The author is Director, Wishlist Capital Advisors