Maybe because I am seen as a retirement person, but every 55+ year old I meet asks me this question:
“Should I sell out all my equity by the time I am 60 or should I keep some equity well into my retirement?”
And I actually have no clear answer for this question. I have 3 methods, and each one could work for you. What I did for my father’s portfolio is different from all the 3, so there are other methods too..However, broadly speaking these 3 methods could work, or you could tweak it a little.
- The classic old school (American) way of Equity:Debt ratio in which you put about 60% in debt (your 100- age formula) and about 40% in debt instruments: This is good especially if you have some inflation adjusting pension, rent, annuity, etc. which allows you to worry less about inflation. Over a 10 year period if your savings have all gone to debt instruments post retirement, and the corpus size increased, that alone would have reduced the equity portion. In case you have sold some equity in the decade leading to your 70th birthday, make sure you are about 30% in equities – by now preferably in the cheapest index fund, growth option. From age 80 you could go to a 90% debt and 10% equity portfolio without any risk.
- The other method which can be used is to start with an aggressive 40% debt and 60% equity, but with a religious reallocation of about 1% over the next 20 years. This means by the time you are 80 years of age you would have moved to about 40% in equities. Now you will want to be in say 15% equities, so use the excess that you have in equities to buy yourself an annuity (no Return of premium) and whatever equity exposure you wish to have goes to the cheapest index fund.
- The even more radical (new) method that I have seen is when people have only 30% in equity. Here the modus is simple – use the debt assets income (largely capital gains from debt funds and interest) to do a SIP into equity. This can nicely increase the equity portion to say 50% by the time you are say 75 years of age. This may have also increased your appetite for risk, and your net worth. This method though sounding very radical is actually protecting you from a dramatic fall in the early part of your retired life – say a 40% fall in equity markets in the year that you retire. Such a fall could wipe out a very big portion of your portfolio and leave you scarred for life.
All these methods are useful and can work. Ultimately how much corpus you have at the end of your working life depended upon how well your money got managed. How well equities do for you depends on how well you understand equity investing, and how well you control your emotions. Luck too plays a part, and your ability to keep it simple is even more crucial.
In case of my father’s portfolio, I took some big gambles. He was already an equity investor by the time he retired, and must have been about 40% in equities. I used his retirement corpus to direct equities and created an income flow (dividends) from age 65 to age 75. He has a FIXED pension which is now so insignificant that it does not even matter. He had a retainership from age 60 to age 65 which more than took care of his expenses. I had started earning and knew that I could back up a bad year of equity performance just in case…
However, by the time he reached his 70th birthday he had gone to almost zero debt investments. He had a spare house (fall back option) and a dividend income far more than his expenses. Now age age 87 he is doing an SIP (in an equity fund of course) from the dividend income of his equity portfolio. His debt assets can hopefully take care of his expenses for the rest of his life 🙂 . Real high risk strategy – but I must add that enough trading income was also created – and that ensured that most of the dividends were ploughed back in equities – direct and mutual funds.
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