If you invest as per your asset allocation after taking into account the life cycle, there is a high possibility that you will retire rich

"I saved diligently in the past for retirement and have been disciplined in savings for future too but I am not aware of concrete plans"

"I know my goals but are not aware of how to allocate my assets"

"I have given my priorities for immediate goals like kid's education, house purchase but I have not thought so on long term goal like retirement planning"

The above mentioned are few situations which investors encounter in their life very often. In all likelihood, they have an elusive idea about what their expectations are but they don't have a concrete plan. Retirement Planning is one situation in life where people give least thoughts on the pretext that they would manage it comfortably or their kids will do the needful. In many situations, people have planned but they fail to follow the most important principle of asset allocation as they perceive that risks are same in all situations.

Why asset allocation is important?

Ideally, asset allocation and retirement planning are complementary to each other. An asset allocation as per your age will give a roadmap to identify the risk taking capacity and accordingly adjust your portfolio. An individual goes through different phases of life – accumulation, consolidation and spending and if you have not perceived your risks and accordingly adjust your portfolio in advance, even your disciplined investment habits will fail to achieve your target. Also, there is another demon, inflation which kills your purchasing power and depreciates your fund's future value.

So, how the life cycle of wealth accumulation impacts your retirement planning?

Accumulation phase – Since you are young and you have a long time horizon for investments, you should focus on relatively high risk, high return and capital oriented assets. Say, if you are in late 20s or early 30s, you should ideally have 70-80% of your investments in equity. The power of compounding does wonders if you start your investments early and continue despite all upheavals. So, for your retirement planning, this is the phase where you should make your maximum money, whatever small it may be, to reap benefits in your sunset years.

Consolidation phase – It takes place during the mid-to-late stages of your life. By now, you would have reduced your debt and should begin to generate more than sufficient savings with which to seriously invest for retirement. Since your horizon is still longer, focus should remain on higher risk, higher return assets. But as you move through this phase and the time horizon starts to shorten, there should be progressive shift to lower risk (less volatile) investment options, say from 70-80% equity allocation to 40-50%. This in turn will reduce your portfolio volatility but keep your investment returns reasonable. 

Spending phase – Spending commences at retirement as employment or business income ceases or slows. By this time, you should have finished your debt and accumulated enough assets. However, the primary goal should be to make your investments diligently; at the same time, there should not be too much reliance on low risk investments which will result in low returns, even negative sometime. This might lead to your inability to meet your retirement objectives. One mistake people do while they decide about the retirement age is they forget the vesting period as they retire earlier. For example, if they retire at 45-50, they still have 30-35 years of retirement life till their life expectancy which they will feed from the accumulated assets during the accumulation phase.

Common mistakes

You follow an investment allocation; however, you don't rebalance the portfolio as per the market movement. For example, you are 40 years old and your suggested asset allocation is 60 per cent in equity and 40 per cent in debt. Let us say, your equity and debt component moved by 40% and 8% in a year, the new investment ratio will be 66% and 34% respectively. Here, you should rebalance your portfolio and bring back the ratio to 60:40 as your risk has increased in your portfolio post the market movement. This is major mistake which all investors ignore. If we simply follow our investment pattern/asset allocation in line with our advisor's advice, 80-90% of our job is done. 10-20% work remains in bottom up selection of suitable schemes. 

What needs to be kept in mind?

"Invest early, sleep late" is the sole mantra of a successful retirement life. However, if you don't follow the principles of investing and adjust your portfolio risk as per the market expectations, your disciplined investment too will not suffice your future savings. The concept of strategic and tactical asset allocation still work in tandem which must be diligently followed as conveyed by your financial advisor. Make a detailed investment advisory plan with your advisor and review your portfolio on a fixed interval, ideally every year to readjust the asset allocation. 

Retirement is one arena where most of us fail to perceive the quantum of commitment required. In most of the times, either we procrastinate or we leave it to our fates. However, if we diligently follow investment advice and follow the asset allocation scientifically as per your age, you are through your sunny day goal, retirement goal and you will end up having a happy sunset life.