I am frequently asked how I manage my own retirement finances. Retired households can have dramatically different financial situations so my style may or may not work for everyone, but it shows some of my philosophies. Read it but please develop your own style.

It is amazing to see how often people check on their portfolios – and their overconfidence in thinking that they know what an ideal asset allocation ratio should be. I am talking even of those people who completely messed up their working lives in terms of saving and investing. I guess when they have nothing else to do and need a new cause of stress they sit down and look at their portfolios. Also they get a feeling that they are ‘monitoring’ their portfolios.

I have an extremely concentrated – equity – portfolio, with about 90% in equities. I know this sounds high, but my monthly income from dividends is enough to take care of my day to day expenses, and my current income from work is about 10X my monthly income. So a 20% fall in my equity portfolio is not something that will stress me. Yes it will hurt, but it will not stress. I will not consider changing my asset allocation or be worried about.

About 90% of my “wealth” is contained in my portfolio, so a 4% decline in my portfolio value represents about 3.6% of my wealth. For a person with current income, this is not a number to worry about. My portfolio is in an Indian website and my net-worth is in an American website. Viewing individual share losses as a percentage of your net worth can be far more calming than seeing an investment share falling say 25% just because there was a movement in crude prices. Frankly I do not care about the impact of crude prices on my portfolio. Crude is a commodity and it will fluctuate. Frequent portfolio checking is usually an indicator of excess allocation to equity, not understanding equity, or a very active trading portfolio with huge intra day and intra week fluctuation. Frequent seeing will not prevent it from falling. Frequent seeing is not ‘monitoring’ of your portfolio. I do not do much of changes in my asset allocation, but will buy some shares to “harvest” a tax loss – especially of good companies which are about to declare a bonus or have already declared one and are quickly going exbonus. With a stupid LTCG of Rs. 1L per annum tax limit, I might do some tax harvesting transactions, but am not sure about it.

I belong to the  William Bernstein school of thought that rebalancing is not necessary if you are confident of your income stream – but that is for another day. In short, I don’t rebalance. For advisory clients I do rebalance – more as a portfolio protecting technique, not as an aggressive return seeking technique. Most of your SIP returns even over 3 years must now be in mid single digits, it may not make sense to rebalance EVEN if you have over done on equity. I will wait for a equity harvesting. This may not feel like sowing season, but it does not feel like harvesting season either!

I have a strong cash flow – in terms of interest, dividends and rent. Apart from this I have current income and just my wife as a dependent. This strong safety-net ensures that market crashes will not lower my (already very low!) standard of living.

 

My top 3 expenses are Income tax, Fund management charges, and GST. Frankly I keep wondering what can I really do about these 3!!

My wife monitors our expenses – and my daughter’s fees is the other big item This goes off in a couple of years, so that is not something to sweat about. It is more or less lying in her portfolio, and that is done.

Spending shocks are (ask Naseem Taleb) low probability events, and I have not ever come across some expense which would keep me awake – in the day or in the night!

I have a very small medical insurance – just Rs. 5L – and a top up and super top up. I am not happy with the cover that I have – and am in the process of talking to a good insurance professional to see what I really need. I have a track record of 15 years of being claim free – so the arrogance perhaps.

I have met many people in the mutual fund industry who do not have a clear picture on asset allocation, taxation, draconian NPS, risks of PPF, but are confident that they have enough money for retirement. There are young people (62 is young) who have 0-10% equity allocation and fret and fume about a 25% CAGR in equity. Seriously it makes more sense to have say 30% equity allocation and be happy about a 12-14% pa return! Under allocating to equity can kill you in the longer run. I heard one man tell his wife that as long as they were living on interest income, and not drawing on capital, they are safe. He is completely wrong, but no, I am not his adviser, I am just an acquaintance with a common hobby.

I do not do much tax planning – the government can always do something to plunder your wealth anyway.

I don’t spend hours and hours on my year-end reviews and planning because I know that any answer I produce will be at best an educated (biased) guess that will need to be updated!  The critical factors of my plan are largely unpredictable – how long I will live, my health, market returns, and expenses. I will need financial, physical, and moral support during my life beyond say 80. Hopefully the finances will help me with the first part, it will leave me with enough resources for buying the physical support and the intellect strong enough to pray for moral support. I don’t lose sleep over market declines or check my portfolio balance excessively because my portfolio reflects my risk tolerance. I have seen 1992, 1993, 2008, without much churn in my stomach. I am not sure how I will react to a big fall once I am completely retired. My dividend income being stable is a huge, huge plus.

If your problems are different, I suggest hiring a good adviser. I am planning to get an adviser soon – it feels nice to have a review done anyway.

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  1. Hi Subra sir, What is the objective of investment in equity. You view investment as a vehicle for:-
    (A) Getting rich OR (B) Capital preservation OR (C) Retirement ? This is case (C) as the title says.

    Suppose 3 households have same expenses and lifestyle has 50K per month. If family invests equity:cash ratio for 3 households A,B,C is 9L:1L, 90L:10L and 9Cr:1Cr respectively. Then on a proportion basis all have same allocation of 90%:10%. However the ‘pinch’ of erratic markets will be 3 different cases for these 3 different people?

  2. I know lot of govt school teachers who got farm lands either through inheritance or FIL’s route, never complain whether they got a profit or loss from agriculture. Because it is not a primary income and in business terminology it is called, staying in the game for long.

  3. It is like break even. (in economics we have break even point for business. Fixed costs, Variable costs and break-even point. A point after which business starts to make profit. Till then business will be in loss..)

    Like-wise, think the other way round. Here you are the business.. If your monthly expenses go on smoothly with the regular income (for eg. interest, salary, spouse income, house rent) you are in comfort zone for time being. So, the first motive is to create the asset which will generate the regular fixed income first. (secure these assets first – debt instruments, FD). Then when you cross the ‘threshold’ (to meet monthly expenses) through fixed income portion, there is surplus, you invest in an asset which will create variable income.( shares, Mutual Funds). You should ensure is that you should not have too much in assets generating fixed income.. It is true for middle-class. What do you think ?

  4. Which Indian and American websites do you use for portfolio and Net Worth tracking? It will help us use them as well.

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