Steps to build portfolio for early retirement


  • Your retirement portfolio needs to be robust so that it remains stand strong under all conditions.
  • Before planning for your retirement portfolio, you must have a corpus amount in mind that would be sufficient enough to take care of your living expenses.
  • In the early age, you can have a higher concentration towards smaller companies that generates a potentially higher reward.

When working and saving in you early work life, you typically get a chance to invest your surplus amount towards your retirement planning in a way that gives it the highest possible potential to earn returns while planning to ride out any big market downturns.

The construction of a portfolio changes with a change in the end term goal. A different goal means a different portfolio. A retirement portfolio needs to produce reliable cash flows that last the rest of your life regardless the variety of market conditions that occur over your retirement years. For the age when you are no longer able to work, your portfolio must be robust enough to support your current lifestyle (after adjusted for inflation).

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In other words, you need a retirement portfolio that remains stand strong under all conditions. A single market crash or a few stocks in the portfolio going to the dogs must not harm your overall portfolio, else the retirement planning goes for a toss. There are five primary steps you can follow to construct such portfolios.

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  1. Estimate your retirement corpus

Before planning your retirement portfolio, you must have a corpus amount in mind that would be sufficient to take care of your living expenses. Start by accessing your current expenses, then calculate the remaining time in your expected retirement age and multiply your living expenses with this time horizon to come to a figure you would be needing, say, 30 years down the line. Also, never miss to account for inflation while calculating your living expenses after 30 years, which varies from country to country.

  1. Start early and aggressively

You need to understand, the more time you would be having, the better you can prepare for your retirement. To amass the required corpus, it is generally very difficult to achieve via only savings, you need to use the power of compounding to reach your retirement goals. Compounding works best when you have more time to give to your investments to grow. At an early age, you would be able to take higher risk hence aiming for higher potential returns would be much easier, giving your retirement planning a head start.

As you grow older, the risk-taking capacity reduces, not allowing you much to leverage the power of compounding vis high-growth companies.

  1. Go for Systematic Investment Plan (SIP)

Discipline is the key to achieve any of your goals. The retirement planning could go for a toss if the discipline is compromised. Therefore, apart from just having knowledge of when and where to invest, you must be ruthless to follow your plan, without fail. As mentioned earlier, time plays a crucial role in compounding your investment, and a lack of discipline can waste that time.

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To be disciplined, you can follow a Systematic Investment Plan (SIP), which simply means you keep on investing a pre-decided amount month after month, irrespective of market volatility. This helps to stay on the course and increases the probability to help you meet your goals.  

  1. Appropriate asset allocation

Asset allocation simply means how much money is invested in which asset class or other categorisation within a single asset class. Every asset class offers a different trade-off between risk and reward. For example, an equity is generally a riskier asset class than say, bonds. Also, small caps in equities are the riskiest of the lot and blue chips such as Apple and Google are generally the safest bets. In the early age, you can have a higher concentration towards smaller companies, which can help you generates a potentially higher reward. As you grow older, you gradually increase your weightage towards safer assets like bonds.

  1. Cashflow matter

Capital appreciation is probably the most important aspect of investing when you want to reach your mammoth corpus amount. However, once retired, you must be needing a regular source of cashflows to support your lifestyle. This is where interest income plays a major role. As mentioned earlier, as the retirement age comes closer, you can stop focusing on capital appreciation and start focusing on interest income, via investing in good-quality bonds. Also, if you want to maintain a sizable weightage towards equities, then you can look for high dividend paying companies, which pay regular dividends for the required cashflow.

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