Retirement Planning With PMS: A Journey Towards Financial Freedom
When you think about retirement, do you picture yourself in a cosy cabin in the mountains, sipping a warm cup of tea and feeling completely at peace? Now, contrast that with a different picture. You’re in your 60s, but instead of enjoying peace, you’re worried about making ends meet.
No matter your financial freedom goals, planning for it is not something you can leave for the last minute. And that is where portfolio management services (PMS) help you.
PMS has preconceived notions of catering to the extremely wealthy, but that’s not the case anymore. It has evolved over the years and is now accessible to more people than ever before. So, let’s understand why PMS might be one of the keys that may help you get closer to your financial dreams.
Understanding PMS
Before we understand how PMS can help us in our retirement, we need to understand what PMS is. It’s a service where a portfolio manager manages your portfolio of investments. Unlike mutual funds, where funds are pooled together for a common investment goal, PMS allows the investor to have a personalised portfolio.
It’s not just limited to investing in mutual funds or stocks or finding the right bonds. It's about creating a portfolio that aligns with your financial goals, risk appetite, and your retirement goals.
Why choose PMS for retirement planning?
Let’s find out how PMS helps in retirement planning:
- Personalised Investment Plans: PMS offers customised investing plans. A portfolio manager can help you tailor a plan to your specific requirements. Whether you want to achieve aggressive growth or are looking for capital preservation methods, a portfolio manager will seek to create a plan that fits your needs.
- Possibility of Active Portfolio Management: Here, your portfolio manager actively manages your portfolio as per market trends.
- Transparency: PMS provides you with complete transparency, you get to see where your money is exactly invested and also receive regular updates on the performance of your portfolio.
- Diversification: Your portfolio manager uses various asset classes like equities, fixed income, and other alternative investments that can help your portfolio better manoeuvre volatility.
Retirement Goals at Different Life Stages
Your retirement goals will differ based on your life stage. Your risk tolerance, financial goals, and investment horizon will change as you age. Let’s look at different retirement goals for different age brackets and how PMS can help you in achieving them.
Scenario 1
Priya is a 36-year-old marketing professional. She’s in the mid-stage of her career, has been earning well, and has a lot of financial commitments, such as contributing to household expenses, paying all the EMIs, and saving for future needs. She wants to start retirement planning but is not sure where to start.
- Goal: She wants to have a good financial foundation that also focuses on wealth accumulation over time.
- PMS strategy: Since Priya has a long way to go before retirement, her portfolio manager recommends an aggressive approach. She/he recommends a portfolio with a higher allocation to equities and other stocks with higher growth potential. The focus is to maximise returns for the next 20 years. She is advised to set up a fixed number every month to invest, as she understands the power of compounding. As she heads over to her late 40s, the portfolio manager will now switch her allocation to a portfolio that is more conservative ( less equity, more fixed income, and other low-risk securities), as her risk tolerance also changes as she grows older.
Scenario 2
Rajesh is a 40-year-old software engineer with two kids. His financial responsibilities have increased. He has to pay for his children's education, manage his home loans, and plan for his retirement.
- Goal: To seek to achieve a balance with the focus on building wealth while aiming to retain your capital.
- PMS strategy: Rajesh’s portfolio manager will recommend a mix of debt and equities. This allows him to build a corpus that helps in mitigating risk. Some portfolio managers might break down the portfolio based on specific goals, like children’s future education, payment of home loans, and retirement. Each segment is built with its goals in mind. This can help to result in the growth of the portfolio with less volatility.
Scenario 3
Anjali is 50 and nearing her retirement age. She’s been able to save significantly but is concerned about wealth preservation and generating an income stream post-retirement.
- Goal: Wealth preservation and having a potential regular income stream for her retirement years.
- PMS strategy: The portfolio manager shifts the main focus of the portfolio to fixed-income securities, high dividend-paying stocks, and other income-generating assets. Aiming to retain her capital against volatility, the portfolio manager reduces the weightage of equity and other high-volatility assets. While Anjali’s strategy is built based on her current life stage, it undermines the importance of starting early. Let’s better understand how things change when you have more time on your hands.
Importance of Starting Early
If Anjali had started her retirement planning earlier, she could have afforded to take on more risk in her portfolio during her younger years.
Priya, who began planning at a younger age, not only benefited from a longer investment horizon but also had the flexibility to invest in higher-risk securities that could deliver higher potential returns. In contrast, someone like Anjali, who is closer to retirement, needs to prioritise capital preservation over returns.
Now that we have understood how time plays an important role, let’s also look at other things we need to consider before investing in a PMS.
Key Points To Check
- Understand your financial position and goals: Start by questioning what you want your retirement goals to look like, how much you’ll need, what lifestyle you want to experience, and when you would want to achieve that.
- Choosing a PMS provider: Search for a PMS provider who exhibits transparency, has a strong track record and understands your financial goals. However, please note past performance may or may not assure guarantee of any returns.
- Communicate: You must be honest with the information you provide your portfolio manager with such as your risk tolerance and investment horizon. The portfolio will be designed based on these, so it’s important to communicate effectively.
- Monitor your portfolio: Make sure to periodically review your investments and ask for adjustments from the portfolio manager when required.
Final Thoughts
Deciding to invest in PMS for retirement planning can be a smart move. With professional management and a customisable approach, PMS can help you grow and protect your portfolio as you get ready for retirement.
But remember, like any investment, PMS also carries risk. Before making any investment, it’s important that you take the time to properly assess your financial situation, understand what you’re investing in, and seek advice from a trusted financial professional.
Dezerv offers customised portfolio management services that suit your financial needs. Schedule a call today!
FAQs
Is PMS a good investment option?
If you have a substantial corpus and require personalised investments, PMS could be considered. You can also consider combining a PMS scheme with multiple MF schemes to increase your potential for profit across both investment avenues.
What is the 4% rule in retirement planning?
According to Investopedia, the 4% rule states that one should only withdraw 4% of their corpus in their first year post-retirement and withdraw the adjusted amount each year, accounting for inflation.
Can you withdraw funds from PMS at any given time?
As per SEBI, the funds can be withdrawn even before the contract’s maturity. However, the conditions for withdrawal would depend on the agreement signed between the portfolio manager and the client.
