If you are past 40 and spend sleepless nights thinking about your personal finances, you are not alone. Many individuals start late on their retirement savings. The good news is that you can retire comfortably even if you start late.

In this article, we discuss what you should do to consciously accumulate wealth during next 10 years or more that you have till retirement. You should, of course, realise that whatever you do now will not compensate for not starting early.

Catching up

As the saying goes, it is better late than never. You should start your retirement savings gradually, setting aside at least 10 per cent of your after-tax monthly income.

But because you have limited time to accumulate wealth, you should increase your savings every year by 5 percentage points till you reach 25 per cent of your after-tax monthly income. Thereafter, maintain that level, if you cannot increase your savings further.

You may wonder if it is possible to set aside 10 per cent of your after-tax income every month, considering the mortgage and other loans that you have to repay.

Yes, you can… if you carefully review your monthly spending. Document all your household spending for a month. Unless your household is atypical, you can cut at least 5 per cent of your monthly spending without compromising on your basic lifestyle. How? Typical indulgence includes frequent dinners, not to mention needless transportation costs.

You have to reduce some extravagances. Remember, you are trying to catch-up for the lost time to accumulate wealth in your retirement account!

During this period, if you receive any bonus from your employer or windfall gains from lottery or inheritance, invest the money instead of prepaying your existing loans.

The question is: How should you invest, given that you will soon enter a period where you cannot take high investment risk?

Start-late portfolio

Starting late has its problems. You need to accumulate wealth. And that means investing significantly in equity products. Yet, you cannot take too much equity risk, because you do not have a long time to recover losses if the stock market declines.

So, invest 65 per cent in equity and 35 per cent in bonds. The monthly contributions made to your provident fund account can be counted as bond investment. For your equity investment, consider Nifty ETFs or Nifty Index funds. Why?

Equity investment carries two risks. Firstly, the risk that the entire market will decline. And if you buy an active fund, the additional risk is that the active fund could underperform the market. Given the limited time you have to accumulate wealth, reduce the risks associated with your investment. You should, therefore, buy passive products — ETFs and index funds.

Your equity investment should be made through an automatic debit to your bank account. Your bond investments other than PF should be in bank fixed deposits. And that is not all. You should sell a portion of your equity investments every five years to reduce your portfolio risk.

Use the sale proceeds to purchase immediate annuities from insurance companies. The immediate annuities will offer you monthly cash flows, which you do not need till you retire. You should, therefore, reinvest the annuity cash flows into PPF or recurring deposit with banks.

Equity exposure

Because you are starting late, your retirement portfolio will easily morph into your retirement income portfolio. The immediate annuities in your retirement portfolio will pay for your basic lifestyle after your retire — food, clothing, essential transportation and regular health-care costs.

You could also continue the residual equity exposure in your retirement portfolio after you retire; such investment can finance the rising health-care costs as you age.

While your efforts will not compensate for the lost time, the accelerated savings process can help you retire comfortably.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investorlearning solutions. Feedback may be send to >knowledge@thehindu.co.in )

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