Part II – How to manage your portfolio when you near your goal

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This is the second in our 2-part series on managing your portfolio when you near your goal. The first part is here: how close to your goal should you move out of equity. In this second and concluding part, we shall answer if you should have equity in your portfolio, especially in your retirement. We will cover the following questions:

  • Should I move out of equity entirely?
  • Which categories should I hold if I continue with equity?
  • Should I move to debt funds or fixed deposits?
retirement

Let’s take in steps. First step – what’s the purpose of your investment? If it is:

Goal other than retirement: When it is time to deploy money for a goal, say, education or buying a house, there is no question of whether or not to move out of equity. You need the money, you exit your investments. If you are left with more than you need for your goal, you retain some in equity and let it grow. How soon to exit from your equity – we already discussed. So that’s simple.

Leaving it to heirs: If you had been investing in equities – whether through stocks or mutual funds – with the idea of leaving it for your heirs, again there is no question of moving equity out of such a corpus. But here, first ensure that your own retirement kitty is adequate to meet your needs.

Besides, some of you may have adequate pension to cover your living expenses during retirement and hardly need any other regular income stream.

In these cases, you can continue to hold an equity portfolio and allow it to grow and just tend to it periodically. You don’t need any special rules or asset allocation principles here – the normal asset allocation and diversification that’s anyway needed for long-term portfolios apply. Do not let anybody tell you that you cannot hold high equities as you age. If you want to build a legacy portfolio, our legacy/growth portfolio can give you an idea.

If you are the kind who can live within the interest income you get by sticking to the traditional income generation options of post office and FDs, you may not need equity.

Retirement corpus: The kitty on which you are going to live off is the one scenario where you genuinely have to work out if, and how much, equity you should have. I have explained how to do so later in this article. The answer to equity allocation depends on:

  • how much corpus you have
  • the corpus needed for income generation
  • whether you are dependent on the corpus for all your expenses or you have other income sources
  • your risk appetite (not discussed in this article)

When it is best to quit equity

It is best to stay away from equity allocation in your post-retirement corpus, if the first point along with one or more of the other points hold true:

  • One, and most important – you are the kind who can live within the interest income you get by sticking to the traditional income generation options of post office and FDs. 
  • Two, you have never really tracked your investments or understood them and invested only because your bank relationship manager told you to. Good for you if such a portfolio delivered well for you, but in such cases, you can move to easy, safe options that you understand.
  • Three, you want easier management of your portfolio, to keep it simple and with low stress, and which is also easy for your spouse to manage after you.
  • Four, you are not insistent on earning high returns or growing your wealth, and you are comfortable with meeting your needs with safe options; if there is wealth remaining after you, that can go to your heirs.

You can simply exit your equities and shift entirely to debt. There is no point in taking excessive risks or volatility in retirement as long as your regular investments like deposits give you adequate income.

buy hold sell

You can check our retiree portfolios for the options. This will provide you with a combination of traditional fixed income options and low-risk debt funds based on your tax slab. You can stick to the traditional options alone and skip the debt funds if saving taxes is not a priority. You don’t necessarily need mutual funds.

When you can keep equity

You may want to continue with keeping equity in your retirement portfolio if: one, you have been actively tracking equity over the years, two, you think you may outlive your corpus, or three, simply want to continue building wealth as your corpus is adequate to meet your income needs.

In this case, you need to see if you can allocate some amount to equity and still have sufficient corpus for regular income. You can take the help of a financial planner to draw a cash flow plan. But if you want to do this yourself, here are the broad guidelines. You can try following them with this excel sheet.

  • Draw up your annual living expenses (all expenses including medical expenses and even caregiver/attender/nurse cost for at least the last 5 years of your estimated life span) with annual inflation prevailing then. Then see if your present corpus (equity plus debt) will last for at least 10-12 years.
  • You will need to assume growth in your investment as well. For this, assume the entire corpus is in debt is earning a low interest rate. This can be the poorest rate you might get on deposits – say 6-7% in current scenario.
  • If your investment does not meet your requirement, you will have to be prepared to live within your interest income and not deplete capital with higher withdrawals every year. This scenario needs discussion. We will keep it to another day.
  • If your investment sufficiently meets your 12-year requirement, then you can afford to include equity. So now, reduce the income generating portfolio (debt) to 85-90% and see if the corpus still lasts for 10-12 years. If it does, then 10-15% can be invested in equity. You can keep altering this to see if even a 20-25% exposure can be had to equities. The idea here is to ensure you are not compromising on safety of the income corpus.
  • This equity exposure can be slowly transferred to your income generating options after 10 years and thus act as a top up for your dwindling income portfolio.

There is no thumb rule to holding an equity allocation. It depends on the residual corpus after fulfilling at least 10-12 years of your income need.

Let’s take an example. Suppose Radha is retiring at the age of 60 with Rs 1 crore and needs Rs 40,000 per month with a 6% rise every year. She can invest the entire sum in debt and earn, say, an average 7% and ensure the corpus lasts for say 23 years. Or she can invest, say, 25% in equities for the next 12 years or so and the remaining Rs 75 lakh in debt, for her income needs. In this case, she will run out of her debt corpus somewhere in the 17th year. But she can start moving her equity corpus after, say, 13 years (assuming it grew by 10%) and ensure her income corpus lasts longer than the life span of 85 years that she estimated.

You may be wondering how your corpus will not last if the principal is intact and you generate only interest. Please note you are not making do with just interest (if so, the part discussed earlier will apply to you). You are looking at a higher sum every year. So naturally, the corpus will deplete over time.

What am I trying to say here? Simply this:

  • There is no thumb rule to holding an equity allocation. It depends on the residual corpus after fulfilling at least 10-12 years of your income need. And of course, your willingness to hold equity to elongate the life of your corpus.
  • The 10-12-year period of locking the income generating corpus safely is to ensure your medium-term income needs are not compromised or exposed to risk. It is also to reduce the risk of capital loss in equity.

Keep the categories simple

Once you split your portfolios as income-generating portfolio and growth portfolio, you will know what to keep and what not to. Needless to say, the income generating portfolio should have little risk. We’ll talk about this later.

Your equity portfolio should primarily consist of blue-chip stocks that you have already held for long, and/or index funds and/or multi-cap funds and an US-based international fund.

As for equities, exit high-risk categories such as mid and small caps or thematic funds or keep their exposure very minimal. If you held lot of stocks, keep the quality blue chip and emerging blue chip stocks and exit all the high-growth mid or small-cap stocks. It only takes one bear rally to reduce these to penny stocks sometimes. You don’t want such risks at this stage of your life.

Your equity portfolio should primarily consist of blue-chip stocks that you have already held for long, and/or index funds and/or multi-cap funds and an US-based international fund.

The debt portion of your growth portfolio should not take any credit risk. A combination of quality short duration and corporate bond funds or gilt fund should suffice.

Moving to deposits or debt funds for income?

Over the years, I have learnt that the (seemingly) safest of funds do not remain safe. This is true of even liquid funds. Hence, we advocate moving a chunk of your retirement corpus/income generating corpus to traditional deposit options – post office, bank FDs and high-quality deposits. A chunk could be 75-90%, depending on your situation. You can check Prime Deposits for such options.

The remaining 10-25% (don’t up this if your retirement corpus is your only source of income) can be in very low-risk debt funds for 2 reasons:

  • One SWPs in debt funds give you flexibility to change your withdrawal amount. This is absent with regular fixed income options. For example, a 7% 5-year bank FD of Rs 50 lakh will not give you more interest income than the Rs 3.5 lakh per year, even if your own expenses go up. You will be able to change your SWP (systematic withdrawal plan) with a debt fund.
  • Two, for those in the high tax bracket, SWP through debt funds provides significant tax relief. We will do a separate article comparing SWP taxes with tax on regular interest income and also let you know what is an ideal withdrawal to ensure capital remains intact.

But it is important that you know the right categories of debt funds for your income generation portfolio. This is because you don’t want capital volatility when you are doing a regular withdrawal.

If you have held corporate bond funds or high-quality short duration funds for long, you could directly use them for SWP. However, make sure these do not account for over 30% of this income generating debt portfolio. The remaining can be in liquid funds and some proportion in ultra-short funds.

Here, it is important to understand which category of funds generate steady returns on a year-on-year basis since you need regular income.  For example, liquid funds have delivered returns of over 6% on a rolling 1-year return basis 90% of the times. This number is 88% for ultra short funds and 78% for short duration funds. This essentially means that for shorter times frames, there is more certainty of returns from liquid and ultra-short funds. This makes them most amenable for systematic withdrawal plans. 

Conclusion

To conclude, if you have held equities for long, whether you can hold them or exit them depends on whether your corpus is adequate to meet your living expenses for the next decade. You cannot expose your income generation kitty to risk.

The rest if any, can be in equity and can be a source of great cushion. To give you a real-life example – an elderly uncle in my family invested all his retirement proceeds in post office and bank FDs. But there would be times that he needed more income – for example, to deal with his wife’s illness and in later years, having a caregiver for his own needs. He would periodically sell some stocks and replenish his income kitty. These were stocks he had held for 25-30 years. So, he did not have to wait for 5-10 years before selling them. He used them like a savings account – except that it was an emergency fund.

To this extent, trying to box your retirement planning with a set of rules is not necessary in my view. Holding or exiting equity is a choice based on circumstances and not based on financial planning rules.

Our other articles on managing a portfolio are:

prime funds

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10 thoughts on “Part II – How to manage your portfolio when you near your goal”

  1. Madam,
    The cash flow excel sheet lets the equity corpus to grow till it is needed. Wouldn’t periodic re-balancing of equity and fixed income reduce the risk?
    Regards.

    1. Hello Sir, Yes, you’re right that rebalancing can be practised as a matter of prudence. We didn’t incoporate in this for two reasons: one, since we have a 10-12 year time frame and are also suggesting shifting 2 years or so ahead. If you had read our rebalancing article, we would have stated that rebalancing is more important for goals less than a decade. Two, it is quite a bit of effort for a senior citizen and unless he/she has significant exposure to equity (if they do it for just growing wealth then yes, every principle of portfolio maintenance shall be followed). thanks, Vidya

  2. Hi Vidya,
    . On the below statement , is living in interest income wrong? Assume a 2C Fixed income corpus at 6% should generate a lakh per month for a retiree ? Shouldnt that we enough. ANything excess can be in equity? Are we missing something
    If your investment does not meet your requirement, you will have to be prepared to live within your interest income and not deplete capital with higher withdrawals every year. This scenario needs discussion. We will keep it to another day.
    Regards,

    1. Yes of course there is nothing wrong. The first part I have said those who can live withing their interest need not go for equity 🙂 The second part, you will know what I mean if you use the excel. if your needs keep increasing then the corpus will deplete. When it will be deplete is the question. If it last for lifetime, then there is no need to worry. Thanks, Vidya

  3. Gopalakrishna Kumaraswamy

    Thank you very much for this very well articulated article on portfolio post retirement. All options have been laid out superbly. I feel Part 3 on this series should have covered SWP from a total portfolio (having both debt and Equity) post retirement to include details of periodic withdrawal as well as subsequent rebalancing techniques. That would have covered the entire gamut of what you started. Just my suggestion.

  4. Hi Mam,
    I have a question with reference to below statement:
    “If you have held corporate bond funds or high-quality short duration funds for long, you could directly use them for SWP” I understood that but in the next statement you have suggested to cap it 30% of portfolio.
    My question is on capping.
    Considering recent crash during covid-19, I have observed that good short term funds such as suggested in Prime funds were still providing +ve returns! Before crash they were giving around 7.92% and during the crash, returns came down to 4.92%. So, this %ge is still equal to money market fund returns.
    So, the question is, why there should be a cap if the holding period is more than, say, 3 years?

    1. Hello SIr,

      Corporate bond funds and short duration funds show far more volatility than liquid and ultra short. Since your withdrawal in goign to be regular, an income generating portfolio is best kept to low-volatile categories. While 3 eyars is good enough a time for the fund to accumulate some corpus, it still doesn’t protect it from voaltility. Like we mentioned in the artlce, a liquid funds has a far higher chance of giving steady returns of oevr 6% over 1 year time frames then short duration funds. So, if your withdrawal is say 6% every year (this strategy we willd sicuss in a separate SWP article) then you need funds that give this steadily to ensure your capital is reasonably intact.

      thanks
      Vidya

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