Why you must have a separate Retirement Portfolio

By Larissa Fernand |  09-09-19 | 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

In 52 Ways to Wreck Your Retirement: ...And How to Rescue It, author Tino Di Vito narrates a story of two Hollywood legends.

Dustin Hoffman and Gene Hackman put up exemplary performances in Runaway Jury. What many are probably unaware is that they were friends even before they achieved stardom.

In this book, the story goes that Hoffman asks Hackman if he could borrow some money for food. Do remember this was in their starving-and-striving-to-make-it-big actor days. Hackman obliged but noticed numerous Mason jars in Hoffman’s kitchen which had labels on them – rent, books, travel etc. And some even had money in them. Naturally, Hackman asked his friend why he needed to borrow money for food when he did have money. “Well”, Hoffman told him, “there is no money in the food jar!”

It may seem odd to treat money that way, but doing this sort of mental math has its advantage. They money jar method may prevent you from spending more on a particular item than you had planned, but it has another, more important result. With money jars, you realize that what you think you spend is not always what you actually spend. For instance, if you place some money in a money jar for spending on takeout meals, only to run out of money in a few days, it highlights a common problem – we tend to underestimate how much we spend on certain items that we have the most control over.

You don’t need to use jars. If it is literal cash, you can use separate envelopes or bank accounts.

How you can use this to your advantage

I would like to stretch this trait of mental accounting a bit.

Have a separate retirement portfolio. This portfolio could be a mix of equity and debt, depending on how far away from retirement you are. A financial planner once gave me a tip regarding this. He said, "Let’s assume you are doing 3 SIPs into Fund A, Fund B and Fund C, with the sole purpose for retirement. Call each of them as Retirement Fund A, Retirement Fund B and Retirement Fund C." (As against Holiday Fund and Child's Education Fund.)

That will help mentally compartmentalize those investments.

And don’t tap into this kitty for any other goal – be it a vacation or even child’s education (opt for an education loan). What about an emergency? Well, depends what you think of as emergency. I tackled this in detail in Yes, you need an Emergency Fund.

Ensure that your retirement kitty is not touched and every single rupee there is invested with the sole purpose of retirement. Treat that as sacrosanct. Which means, withdrawals are not to be tolerated.

A friend in his 50s told me that when he and his family went through tough times, however much the hit to their lifestyle or discretionary spending, he never stopped his investments into his retirement fund. At one time, when he lost his job, he could not afford the regular contributions into the funds. At that time, he paused for a bit, but never withdrew from the retirement portfolio. His decision: Invest always for your retirement, if you can’t then at least don’t withdraw. He is in a pretty good place now.

How to get started

If you have not embarked on a savings plan for retirement, get started. Now. If you don’t know where to start, opting for a professional adviser can help ensure that all retirement needs are identified, gaps avoided, and eventualities covered.

Decide how much you want to save every single month for retirement. Depending on how far away you are from that eventuality, decide on the asset allocation and the relevant instruments and funds. Then name them as your Retirement Kitty and keep adding to it, not subtracting.

If you really are at a loss, consider reading this book Retire Rich: Invest Rs 40 a day. It will guide you as to how much you need to save for retirement, how to draw up a retirement strategy statement, where to invest for retirement and retirement instruments, and lots more. All explained in a simple and non-intimidating fashion with actual examples and case studies.

Also Read:

5 ways to help you start saving for retirement

A different perspective on retirement

The crucial questions about retirement planning

Why you must draw up a retirement policy statement

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