For most of us, unless we are super rich or super frugal, there is a remarkably high chance that our corpus will evaporate long before we do. The reason is simple. Even a 3-4% inflation annually (if not in living costs, then definitely medical and support costs) will raise the asking rate from your corpus.
A 6-7% return requirement (on your corpus) today can go up to 12% in less than 20 years. That’s not the kind of return any fixed income plan can generate for you.
Result — your corpus depletes, and sometimes rapidly with the occurrence of even a single hospitalisation event without medical cover. This is the primary reason why you need something that still compounds your money sufficiently post retirement. Cut to the chase, you need equity post retirement.
Before we start, please note that I am not suggesting that you start equities in your 60s. It is not impossible to do this, but ridiculously hard to deal with the volatility of equities at a time when your income stream stops. And, the current stock market is not for newbies in their 60s!
If you already invest in equities, you need not exit entirely simply because you are retiring. You may need to rejig the risk profile of your investments, though.
Income stream
Before making the decision of continuing with equities, you should be sure of the following: one, you have 7-10 years of your income needs (with inflation) tucked away in ‘income generating’ debt (traditional instruments such as deposits, post office or annuity, or market-linked). Only if you have surplus post this should you venture into equities.
Two, of the above, you must have at least 1-2 years’ of income-generating corpus in the most liquid and safe (read low-yielding) options set asidefor emergencies. If you don’t satisfy the above and you still have some years to retire — increase your savings, please.
How much equity?
You will likely hear advisers suggest a certain percentage of income that can be invested in equity based on your age. But this really should not be ruled-based. The surplus left after you set aside corpus for income generation as indicated above, is what you can afford to deploy in equities.
If your surplus is limited, then you should be careful with equity investments. But here’s the key point — at all times, you need to have some liquid component — yes, even in the corpus earmarked for equity. This could be 10% or 50%. You’ll know why later in this article.
Now, for the channels to equity investing.
Unless you have a good adviser, the best option is to stick to passive index funds or index ETFs. They are simple and easy to maintain and leave you more time to focus on better things in life!
If you have active funds, consider slowly shifting the equity component to a good mix of large and multi-cap index funds closer to retirement.
At all times, it is good to have some cash component like a fund manager — say 10-30% — via liquid funds or your savings account too. Check annually to see if your equity has grown or reduced. E.g., if you had an 80:20 equity : liquid component and if equity is now 90%, then sweep some equity into low-risk debt options to bring your original allocation back.
If a correction causes equity to fall to say 70-75% from 80%, then shift the cash you hold into equity. This you can do without following the market, simply based on your own equity allocation. This will help two things: reduce portfolio hits and provide chances to average.
For more advanced investors who you have observed markets for long and understand when they are overvalued, no harm sweeping more money into liquid or debt funds when markets swell. This is especially important when you deal with stocks. On the stock portfolio makeover — clean up the portfolio to only include large, stable companies, or market leaders even if they are mid-caps. Have some value tilt (to ensure portfolio swings are less) and importantly, keep good steady dividend payout candidates even if their growth prospects are not superlative. While you should not count on stock dividend to generate your regular income, dividends can act as a terrific supplement to your income, especially if your cost of living rises steeply.
Cut losses on stocks you have held for years, waiting for a turnaround. Stop looking for micro- and small-cap stocks that will be the next multi-baggers. You cannot afford such risks in this phase of your life!
Follow the rebalancing that we suggested earlier. When you do this, remove the dud stocks first and not the compounders. Lastly, if you have been trading for years, and your itch for trading hasn’t left you, then keep a small sum say 2-5% as ‘play money’ and indulge yourself without touching your core equity portfolio.
(The writer is co-founder, Primeinvestor.in)
