You and your spouse are contemplating retirement, what are the important things to do?

Well let us start at the very beginning. Assuming that you are Doing It Yourself, or you have an adviser (but you are not sure of his competence) it is time that you take charge.

  1. First and Foremost go into a meditative state: no disturbances. No outside noise. No laptop, no phone calls. Ask yourself what portfolio combination (aka asset allocation) will make sure that the money lasts till you are 100 years old, at what age you think you will not be able to apply your mind to complex portfolio questions (age 70 is a good guess, better to err on the the safer side), and then try to fill up risk questionnaires available online. Vanguard has a 11 question risk tolerance questionnaire, and for more comprehensive ones you will have to pay. PLEASE note that it takes many years to understand your risk profile – because your brain thinks differently when the sensex is 30,000 and when the sensex is 21000 (on the way down from 30k). It also thinks differently during a bull run (not just a static number) and in a bear run. It also depends on how addicted to financial porn. So first relax, then fill up the risk profile.
  2. Are you saving enough: The old theory used to be you need to save 10% of your income right from the beginning and that would build a nice corpus for you. However, if you are not a government servant you need to be prepared for some disruptions in your career – voluntary or involuntary. If you are a woman pregnancy is likely to interrupt your ability to invest /save regularly. If you have a sibling / parent who needs medical care you might take a break, etc. Assuming that there will be some interruptions targeting a 15% contribution to the retirement basket is a better idea. See where you have reached and have you made that contribution. If you are just 35 there is room for some quick corrective action. If you are 55 you may have to push your retirement back or make a more aggressive asset mix to achieve the targeted corpus.
  3. Do you have a sensible investing strategy: This means shutting out all the financial porn, creating your own financial plan, investing and doing a regular audit. Sure your mind knows what you are doing. Try writing it down and monitoring it on a regular basis. Too many idiots think investing for the long term means buying an equity share and seeing it after 20 years. That is stupid. You need to watch Quarter on Quarter and DECIDE that the share is worth holding over a 30 year period. IT IS ACTIVE INACTION, not passive laziness. So are you doing this asset cleaning, asset allocation, taking a risk tolerance test regularly, having the portfolio reviewed by a friend / IFA / …etc..etc.
  4. Are you fine tuning your plan: Having a strategy is fine, make sure that you are implementing it perfectly, or taking corrective action. A health emergency, a dip in earnings, a student draw down by a kid, major repairs to the house – you may have dipped into the retirement fund. Take corrective action to replenish the funds asap. If you need a small amount decide that you will borrow that money but you will NOT WITHDRAW from the retirement plan.
  5.  If you are about 10 years away from Retirement, you need a Retirement Income Strategy: You have to learn about retirement basket and retirement buckets for your retirement income strategy. SWP from an equity fund is the stupidest thing to do. If you do a back testing over a 30 year period in India it will feel like SWP works – remember we have had a rising market from 1979 till date. However there can be many rolling periods in between where SWP did not work. It is scary, and makes no sense. Learn when there is time.

Five is a good number to start…

 

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  1. SWP from equity funds is not as stupid as you think. Incidentally, I wrote a piece on the same subject yesterday. I’ve explained in detail as to how it works. What makes you think what has worked for last 35 years will not work for next 40 years. You check SWP for any diversified equity fund for a period of 10 to 20 years (since when they are in existence). It has done well for creating comfortable income for oneself and good wealth for next generation.

  2. Only creating buckets of volatile and non volatile assets can work. Exactly why a SIP works an SWP cannot work. Also how a Muthu reacts at 37 towards volatility will not be the same as how he reacts to volatility at 73.

    Personally I will be in a lot of equities even at 73 – maybe in an index fund, but that is not what I will depend upon for my meal. That will be a less volatile asset like Annuity / bank fd.

    Ha…discussion has to be offline..it is too damn complex. Back testing has to be automated with weekly stops and different start stop times. Imagine the heart condition in 2008-9, Why even 2009-2013….do not go by numbers. Use Behavioural finance, not mathematics. Its complicated.

  3. I agree about the behaviour part. If an advisor is able to influence the behaviour of the clients (as we do for SIP), it would work well. I checked the workings for 2008 also. For me, it isn’t scary! If you see my example, the corpus is big and withdrawal rate is only 4%. Also combination of liquid fund is used and withdrawal is from the same when the market falls more than 30%.

    We’ll discuss this offline when there is an opportunity.

  4. Muthu,

    Moving money from equity to a debt fund and doing SWP from a debt fund is a better idea than doing it directly from a equity fund. Doing SWP from an equity fund is risky because SWP during a major stock crash will result in money being pulled out just at the time it may be best to invest.

    Moving a fixed % to debt at regular intervals or when you feel market has peaked is a better idea.

  5. Prashanth,

    If you read my article, I’ve mentioned about stopping of SWPs when the market crash is 30% or more. If the retiree is fine with volatility of the corpus (but the monthly SWP amount would be fixed), then a major portion can be allocated to equity funds. Having 3 year expenses in liquid fund is a buffer to cushion volatility. What I suggest would work as long as markets are cyclical and the long term trend is upwards.

  6. “retiree is fine with volatility” is a dynamic thing. He was fine in 2008 but may panic in 2017. This is IMPOSSIBLE to gauge. At 88 my dad has ABSOLUTELY NO CLUE of his portfolio, I am managing it. His annual expenses are about half of his dividend income. So he has managed to create a fail proof portfolio.

    At 53 I am not sure whether I will create such a brave portfolio for myself (my dad is in about 90% equity, because of the sheer size). If I do not know who will handle my portfolio I will move a more conservative annuity based portfolio. It changes as per Behavioural finance, not excel working

  7. Agreed. It depends on the individual and his life & financial situation. What I’ve mentioned is a broad idea. What I suggest for individual client would definitely vary.

  8. “…Based on the past performance and our faith in the future, we expect equity funds to deliver around 18% annualised returns over long run..”

    faith should be replaced by hope / prayer

    18% ??? – LOL

  9. Keep laughing Ajay Rajaram.

    CRISIL AMFI Equity Fund Performance index:

    As on 1’st April 1997 : 1000

    As on 31’st March 2015: 39971

    Annualised return: 22.74%

    Money multiplied by 40 times

  10. “…Beware of past performance proofs in finance. If history books were the key to riches, the Forbes 400 would consist of librarians… ”

    — Warren Buffett

  11. Past performance gives an idea of the potential that lies ahead. I’m optimistic about future of this country, economy, corporates and hence stock markets.

  12. Ajay Rajaram: By being a pessimist and sounding cynical, you may try to look intelligent. But with this attitude you would never make any money from stock markets.

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