When a 48 year old looks at the fluctuation in his retirement portfolio, he may feel concerned but not unduly worried. He is still in the accumulation stage and believes (as if by magic) by the time he retires, the magic figure that he wants will be in place. Let us call this magic number – 1 Million US $. He might just sit with friends and have a round of drinks laugh and joke about it. He might be slightly worried – enough to tell his wife while going off to bed, but nothing more than that.

Volatility – or a permanent fall in the value of the portfolio – are BOTH causes for concern for an older person who is ALREADY in retirement. The fall looks scary. When the main income stops, risk and volatility have a much more tangible ramifications in retirement. A retiree who takes too little risk in her portfolio–or simply takes too much out in withdrawals–increases the chances of running out of money if she lives a very long time. Meanwhile, the retiree with a portfolio that’s overly aggressively positioned could run headlong into a big equity sell-off too close to retirement, permanently denting the portfolio he was ready to draw down. Goldilocks risk management – not too risky, not too little risky is a balance which is difficult to aim for!

Let us run through some of the questions that a retiree (anybody aged more than 55) should be asking themselves:

  1. Have I kept enough liquidity in the portfolio: what job cash can do, only cash can do! there is no point in having a lot of assets, if you do not have cash to pay the grocer, milkman and the maid. Retirees will also have to create a box with emergency funds set aside to cover unanticipated expenses.
  2. Does the portfolio have enough GROWTH potential: I see too many people compromising all the profitability to have liquidity in the portfolio. This can also hurt. If you decide that Rs. 4 lakhs is your annual expenses and you have Rs. 12 in a combination of savings account, short term bond fund, liquid fund and bank fixed deposits – you do not need an emergency fund. This fund combination acts as an emergency fund also. Once you have this, then look to having enough growth assets in terms of direct equity or equity mutual funds. To earn a positive real return over their 15- to 30-year in-retirement time horizons, investors have must venture into assets with a higher potential payoffs, main shares.
  3. Do you have adequate Medical Insurance: I am assuming that life insurance is not necessary at this stage – so make sure that you have adequate medical insurance. Not having adequate, and appropriate insurance can put an unnecessary load on the portfolio.
  4. Make sure that you do not ‘help’ others beyond your ability to provide for them. Remember this too comes from your RETIREE PORTFOLIO.
  5. Is there too much risk in the portfolio: At the opposite extreme of the spectrum, retirement portfolios that are too heavy on shares court “sequence of return risk”. I have written about this earlier – if you have a lot of your portfolio eaten away in the early days of your retirement, there will not be enough left to grow when the growth happens. This happens because when the markets are depressed you will have to sell aggressively to meet your expense requirements. That may not be sustainable. Also at age 45 you may look at a fall and laugh but at 69 you may (will) react differently. Retirees with too-risky portfolios MAY court more behavioral risks–that is, if their portfolios are too stock-heavy, they might be inclined to switch to a more conservative mix AFTER their portfolios have CRASHED. Periodic trimming of lopsided portfolios is necessary.
  6.  Do you have a Draw Down Strategy? Do you know in what sequence you will withdraw? Do you have the bucket theory of withdrawals? Do you have a younger kid who will be 50 by the time you are 75? he/she may have to help you in creating the withdrawal buckets, holding buckets, and growth buckets. Do you have it in place? Take too much and you risk running out of money prematurely; take too little and you risk not enjoying your retirement fully because you’ve under spent. The specific strategy you use to extract money from your portfolio–harvesting income, selling appreciated securities, or a combination of the two–can also influence your long-term return. Because draw-down/withdrawal strategies are so central to the success or failure of a retirement plan, YOU have to learn it yourself. I am yet to meet an IFA who is comfortable with ‘bucket’ theories.
  7. Do you know how to handle big time inflation?
  8. How will you handle big spending shocks? What if your wife’s cancer treatment cost you more than what was covered by insurance? What if you decide to bail out your son from a difficult business situation – and that took a big chunk of your money?Even retiree portfolios that are sensibly allocated and employ reasonable withdrawal strategies can run into problems if spending exceeds expectations. Healthcare expenses in retirement can surprise on the downside. Are you prepared?
  9. Is there a back up plan? Last but not least, every portfolio needs a succession plan–a basic outline of what should happen if you’re no longer able to manage your assets on  your own. Enumerating all of your financial assets in a spreadsheet or other document is a good first step. I am planning to appoint 2 girls and 1 boy – all under 30 now – to look after my portfolio once I turn 70-72. Of course I will go to a portfolio of index fund, annuity, bank fixed deposits at this stage. I am not sure whether my head will accept that I go to a zero direct equity every. Hence the back up plan. Currently I am playing this role for 2 people in the mid 80s and of course for my parents too.



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