Solution:-
Investing for retirement is very different from investing
otherwise. Retirement-focused investing can afford very little risk
and since the investment horizon is extremely long, the consistency
of returns resulting in leveraging the power of compounding becomes
very important. The objective is to make sure that the risk of the
retirement portfolio remains as low as possible while generating
good returns that not only covers the inflationary impacts but
build enough for retirement goals.
The impact of various factors on retirement planning and ways to
address those impacts are as follows:
- Economic conditions are like the inevitable
which can't be ignored and they impact long-term returns
inevitably. That's why the retirement portfolio should be invested
in an economy which is safe and growing.
- Investment vehicles chosen to invest the
retirement portfolio is very important as factors such as taxation,
liquidity, management fee, etc are completely dependent on the
choice of vehicles. The retirement planning must include choosing
vehicles that offer the best financial platform to invest money for
the long-term.
- Diversification is the single biggest factor
that must be taken into consideration while investing the
retirement portfolio. The retirement portfolio should be
diversified into multiple asset classes as well as geographies.
This ensures that the whole portfolio is not exposed to the same
risks and thus can be considered safe for retirement purposes.
- The retirement portfolio must be designed to ensure that the
expected rates of returns from the portfolio are
enough to meet the retirement targets. It should be enough to cover
inflation and generate real wealth over time.
- Inflation eats up the value of money. If the
retirement fund is generating return equal to inflation, it is
essentially creating no wealth for investor as the purchasing power
of money stays the same. As mentioned above, it is a crucial factor
when analysing the expected returns from the portfolio. The idea is
not to just generate nominal returns but to generate real returns,
that covers inflation and builds wealth over time.