Importance of Asset Allocation in Retirement Planning
When you are working and earning a salary, this income helps in managing your day-to-day expenses and lets you save some amount. However, it is also advised to smartly invest some of your savings into different financial instruments to gain returns. While the goal for saving and investment may differ for each individual, the inevitability of retirement is common for everyone.
During your retirement, you do not have any viable sources of income apart from your savings. Relying entirely on savings during retirement is never advised. When you are planning your investments while working, you should also focus on asset allocation for your retirement planning. Read more to under its importance.
What is a retirement plan?
A retirement plan is a type of life insurance plan. Retirement plans help you get some income after you retire. Based on the type of plan you select the income could be either lump sum or it could be monthly. This income could help you with sustaining your vital expenses while safeguarding your savings for future expenses. There are different types of retirement plans that you can consider. Immediate and deferred annuity plans have great benefits while Unit Linked Insurance Plans (ULIPs) can also benefit you in the long run.
What is asset allocation?
In general terms, asset allocation means how you allocate your investments to gain better returns that would contribute to growing your wealth. The main factors that go into asset allocation are the goals, risk appetite and the tenure of how long the investor wants to continue with their investments. When these factors are assessed, you, as an investor, get many options for investment.
Asset allocation in retirement planning: How helpful is it?
When it comes to planning your retirement, here is how asset allocation can be helpful:
- Maintains a backup source
It is always said: never to keep all your eggs in the same basket. The same principle applies to investment. Most first-time investors tend to invest their money in a single instrument. While this may work if the amount is small, it is highly risky if the amount is large. As many financial instruments invest money in markets, the risk of fluctuation is quite high. This should be avoided when planning for retirement. Money should be allocated to assets that spread the risk instead of concentrating in one.
- Offers better returns
As mentioned earlier, investment in one instrument can increase the overall risk factor. There are many investment options that add interest to the amount that you save every month. Some of these options are free from market risks. If you stay invested in them for long, the pay-out from such investments will be higher as the returns get compounded with your investments.
- Saves tax
The other benefit that an investor will look for in an investment other than from the returns is how much tax can be saved. In many financial instruments such as ULIPs and annuity plans, the money that is invested, i.e., premiums are tax-exempted under Section 80C of the Income Tax Act. The pay-outs or any withdrawals that you do during the tenure of these investments are also exempted under different sections of the Income Tax Act.
Should you do asset allocation?
It may seem that investing money in different options can be a task; however, when it comes to retirement, it is better to have different sources of income. When one source of income pays you more than the other, you can put the other option for good use. This helps in accomplishing goals that you may plan in your future. Or it can help in planning the future of your loved ones.
When planning your retirement, always remember to put emphasis on asset allocation. Before you invest in any plans related to retirement, take the help of the retirement calculator. It will give you an idea about how much funds you would require once you retire.
