One of the risks while in Retirement (and the main reason why SWP does not work) is ‘Sequence of Return Risk’. This is the risk of the difference between finishing your corpus before you die (disaster) and leaving a nice fortune for your heirs (desirable but not necessary).

So if you retired in say 1991 and invested all your money in shares in 1992 without doing a STP or SIP…you would have ERODED 43% of your capital in 1993. That would have crippled you so badly that it would have taken you a decade to just reach the starting point of 1992. On the other hand if you had retired in 1992 end, and invested all your money in 1993 you would have benefited by investing in a market which was at the bottom. Just, BLOODY luck. Aka sequence of return risk. So an average return of 14% – with returns like -25%, 0%, -11%, 18%, 22%……is very different from 23%, 11%, -18%, 0%….In the former case the capital is wiped out – and is so puny that 18% rise is not felt at all. However when the capital is up by 40%..and then falls 18%, the mind and body both are willing to accept the returns.

How to avoid sequence of return risk? Well you cannot, but asset allocation and bucket investing are the answers.

More importantly the other risk – of poor asset allocation – too much in equity or too little in equity – can also hurt your return.

The only (rather best) solution to all these problems of course is to have a huge corpus. So you find out from the calculators that you need Rs. 8 crores for retirement. At the age of 55 you find that you have Rs. 13 crores and your children related expenses are over. Great situation. Now go and do your asset allocation on the basis of your 8 crore portfolio. Your excess could lie in equity (anyway it is an excess) or in debt (why risk when you do not need to?).

One of the things you can do with that excess is to buy some annuities -deferred – from LIC (repeat LIC) with a 5 year deferral and some with a 10 year deferral. Or put it in the same asset allocation model as you have done with the 8 crores.

In all such cases, you will not be hit by sequence of return risk or asset allocation risk.

What is important is to understand that you are going to invest ONLY in 2 asset classes – equity and debt. I am against RE investment for retirement investing – the asset is not liquid in case you need partial liquidity. So unless it  is outside the ABSOLUTE MINIMUM REQUIRED to retire, I would not suggest RE. RE can only be in excess of the minimum required.

If your core is strong – 2/3 good equity mf, some debt funds, SCSS, annuities – making sure that the FLOOR INCOME ADJUSTED FOR INFLATION is rock solid AND you have an excess that can be in equities. Or RE.