-Dr Sanjay Tolani, CEO & MD, Goodwill world
Increasing prospects of a longer lifespan are encouraging retirees and those in a pre-retirement stage to continue investing and making their money work hard even after they choose to stop working. Nevertheless, it is crucial to understand that not all investments are as viable as they may seem at a younger age, and one must consider the timeframe of their investments and build multiple income streams accordingly. As a financial advisor who has helped many individuals and businesses achieve financial security and grow far beyond that, I strongly recommend that the shift from asset accumulation to income accumulation should be decided based on one’s age and risk-taking ability at that stage. It is of paramount importance for baby boomers, or anyone looking to retire, to be invested in a combination of income sources to achieve financial portfolio compounding over the years and even generations.
Having spoken on financial planning in over 50 countries and written many books about it, I’d like to explain the concept of income accumulation using a simple example of the flow of water in the world. It begins with a melting glacier at the top of slow-clad mountains which forms a lake or a pond that feeds into tiny rivulets. These merge to form a mighty river that eventually meets the ocean. Ocean water evaporates to come down again as rain and form other lakes and ponds that feed rivers and tributaries which ultimately join the ocean again. This interconnected flow and generation of water is very similar to how income accumulation works – think of a family as a lake and a river as an income stream; these income streams come together to join the ocean of family wealth which can act as a lake of resources for the next generation – and the cycle continues generation after generation. However, if one generation decides not to pass on this ocean of wealth to the next, there will be no lake and the next generation will have to start everything from the very beginning to build this river of income!
“Should you give a lake to your family, or should you leave them a river of income?” If one looks closely, a river of income can either be guaranteed or variable. It is sensible to make sure some of it is guaranteed and some of it is variable because the guaranteed part ensures that there is always water flowing in the system, while the variable bit ensures that the money continues to grow at a faster pace. This helps make sure that the ocean of wealth is always growing. This concept of building multiple streams of income is one of the best ways to establish financial security as well as wealth generation, especially during one’s retirement years. A lot of people try to achieve this through asset accumulation which results from the savings and growth of their financial assets during the course of their working years. Instead of holding on to all of these after retirement, one should look at them as the basis for decumulation during their retirement years – an incredible opportunity because illiquid assets can often become liabilities in numerous ways during old age.
Retirement planning needs to be done carefully to ensure a smooth flow of income going forward. The ABCD retirement strategy can be useful if done right. Think about your retirement period and divide it into 4 parts wherein an Aggressive strategy can be followed in the first 28%-30% of the years, followed by a more Balanced approach over the next 28%-30% of the years before moving to take more Cautious financial decisions in the next 28%-30% years, and finally going completely Defensive in the final 10%-16% years. There are 5 asset classes that advisors that form a part of advisors’ asset accumulation strategy to their clients – property, equity, bonds, commodities, and cash – completely discarding the fact that an asset like a property, for instance, can be a headache for an 80-year-old to handle, maintain, and protect. As an advisor, I tell my clients to focus more on income accumulation instead, because the goal of retirement is to build up a stream of consistent income for the client, without any hassle. Retirees want to be getting income every single period of their life, rather than having to work on their assets, restore their assets or even manage their assets. Income accumulation is the only relevant part of asset accumulation for a senior citizen.
Thus, when planning for retirement, it is important for you to identify the different possible sources of income you have when you retire. Rental income, bonds, fixed deposits, equity, government schemes, life insurance and retirement plans, like annuity and products that allow regular withdrawals are all different ways to go about your retirement planning, and it really pays to have a healthy mix of these in your portfolio. There is nothing wrong or right about income or asset accumulation, it’s all about sensibly diversifying one’s approach and portfolio to reap returns for a lifetime, and beyond.
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