Retirement is always an important age because it is when no one wants to work and just enjoy the rest of their lives. The planning for such financial freedom begins at a very early age. The reason is one cannot be a crorepati overnight without the assistance of pure luck which is extremely rare. Hence we have to plan the entire financial tenure post retirement. For the same there are multiple saving options available and multiple schemes as well. These schemes enable you to receive a fixed amount of money at the end or beginning of every year at a certain fixed period of time.
Such schemes are extremely famous for LIC. The company has numerous schemes available for each occasion and every stage of life. However self investment can also be an option which can be done through many techniques and refined methods. One of those is the Equity Glide Method.
Why Self – Investment ?
The most important benefit for opting the self investment method is financial freedom for investing into multiple schemes all together. Thus one can follow the market trends without being dependent on one’s fund to invest on their behalf without any opinion. For opting this method the most important attribute is Discipline, Patience and consistency. Without the disciples to follow the set investment timeline, Patience for returns and consistency of investment one cannot achieve the desired corpus of retirement funds. Lets now discuss the Equity Glide Method.
Equity Glide Path
The method of Equity Glide Path refers to the allocation of assets between equity and debt. This method is widely used for retirement planning by individuals at different age levels. By maintaining and shifting the ratios between equity and debt one can manage the risk reward ratio at various stages.
The equity glide path method is a complete retirement planning program. Individuals have to decide the age when he or she wants to retire and plan their finances and savings accordingly. The method includes diversification of assets in a planned and strategized manner. There are three kinds of Equity Glide Path techniques for the same. They are :
- Declining retirement Equity Glide Path
- Static Equity Glide Path
- Rising Equity Glide Path
These three are differentiated on the basis of the asset allocation ratio and age parameters. Let’s understand all the above techniques.
Declining Retirement Equity Glide Path
This is a method which makes your exposure to equities low with the increase in your age. In other words when you get older your exposure to equities reduces in a timely manner. One renowned method to look at this approach is 100 minus the age rule. This method explains that you should have 100 minus your age in equity exposure. Hence if you are 20 years old you should have 80% of your funds invested into equities. If you are 60 years old you should have 40% of your funds invested into equities. This means as and when you age, the risk of your investment is reduced slowly by 1% and the investment into safer assets like debt, bonds etc. rises. Thus having a stable income source at the time of retirement with a huge amount of capital through risky investments made in equities at a young age.
Static Equity Glide Path
As the name suggests the investment proportion should be fixed in this method and not moved under any circumstances. This means that the risk and reward would remain the same at any given point of time. Under This method if at the beginning of your investment tenure you decide to keep your ratio of investments between equity and safe assets at 60 – 40 respectively then the ratio will remain the same in all circumstances. This means that even if you withdraw some amount of investments from equities then the proportionate amount of investments need to be withdrawn from debt or safer asset classes to maintain the ratio of investments. This method helps you to have an average amount of income every year due to the fixed proportion of investments.
Rising Equity Glide Path
Under this method one has to increase the proportion of investment in equities when he or she gets old. This is the exact opposite of the Declining Equity Glide Path method. This method means an increase in the amount of investments in a slow and positive return method. The initiation of investments can begin with more capital into safer assets and less portion being allocated to equity investments. This means that as you age your risk increases and equally your reward also increases.
Which Method Gives Best Returns ?
Through research it was found that the Rising Equity Glide method gives best returns. For most analysis the initiation of this method should begin with 30% in equities and 70% in safer assets. The research shows that the reward of this method is better in a span of 30 years of time frame. However the best method for anyone is definitely based on their approach and mindset. One can earn better with a static equity method as well if he or she has a high amount of capital and a declining method can also give best returns if individuals start investing at a very young age.