“I have two people who are more than 70 years old. How much of their moneys should be in equities?”

This is the question with which I start my financial planning class for a bank or a securities company. The chances are more than 50 per cent of the class would have done their MBA in finance and would come up with “Sir, 100 years minus their age – so they should have about 30 per cent of their portfolio in equities”. Then, I tell them “Hmmmm not bad, the names of these two people are Azim Premji and Ratan Tata…do you guys want to change the answer please?”.

Sorry, but many thumb rules do not always work. The amount of debt and equity that a person has in his or her portfolio is not just a function of a person’s age, it is also a function of the total corpus, the ability to understand the portfolio, the availability of a support person to look after the portfolio etc.

So, a retiree who has retired at age 48 and thinks will live for another 40 years (may be 50 years for his spouse) HAS TO HAVE equity in his portfolio. There are many ways of looking at a retiree’s portfolio!

Let us see what a retiree portfolio can do and cannot do:
Must do:

* Outlive the owner of the portfolio and his spouse
* Give comfort with a level of money that allows him to sleep
* Retiree should be able to understand and manage it
* Be liquid for some contingencies – just in case!

Can do:
* Give a growth rate higher than the withdrawal rate
* Be volatile, but within a range.

Cannot be expected to do:
* Pay for rights issues, if any
* Seek active management in the working of the company
* Buy more shares to reduce the cost of purchase (averaging)

One of the standard pieces of advice for retirees is that they have to have a very conservative portfolio since they are too old to take any chances with equities. These rules were good guidance for a person in the USA where people retired at the age of 65 and lived till say, 78. As the investment horizon was short, it really did not merit keeping it in equities – it was too short a time frame in which to recover the capital in case of erosion. However for a person who today wants to retire at 50 and has to provide for 30 years, not being in equity is the fastest way to penury. Only equity provides you with a protection against inflation – and inflation is a real threat especially over a 30 year period.

If you are wondering how ‘does it matter’ as to how long a retirement portfolio has to last, please think again! A bad recession or a slow-down from age 58 to age 70 – can unnerve a retired person into taking all the money from equities and put it in debt products.

Then cannot you buy fixed income products? Well this may sound like a simple solution, but it ignores inflation. Over a 30 year period inflation can wreck any portfolio.

The fact is historically equities have beaten other asset classes by a mile. You need equity to help you beat inflation. According to historical records – dividends will keep rising at least at the rate of inflation.Also remember – dividends and long term capital gains are tax free. A retiree should learn the nuances of equity investing. An early start helps, but even if he starts at 45 it is still not too bad!

At 60, you will still have to be in equities – about 40 per cent at least. This is to ensure that your portfolio does not exhaust itself when you are alive!

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  1. I had a query on how to deal with small windfalls (eg. bonus etc)? How does one move that into MF/equity without doing a lumpsum ?

  2. Dear Sir
    I am new to your portal and was trying to find some advice on post retirement planning for my parents. My Father who will be retiring from his service this month end . Their current monthly expense is around 20-25 thousand and he is expected to get pension of 13-14 thousand / month. His PF and gratuity will be around 40lk. Would like your suggestion in investing to have financial independence for their retirement. Some of initial plans are : 15lk in scss 9 lk in post office monthly income scheme. 5 -6 lakh in FD. And they have health insurance of 6lk and additional 4lk from my employer. Kindly advice and also let me know where additional saving should be invested to ensure their monthly expense are met.


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