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Accumulation Vs. distribution: How retirement planning differs in 2 phases?

Make sure that you have a proper retirement strategy that is designed to adapt and change with the phases.

July 26, 2022 / 08:11 AM IST

Planning for retirement doesn’t end on your last day at work. You need a plan for the years after retirement, too. This may sound surprising to most people, as their idea of retirement planning revolves around saving during just their working years.

Retirement planning has two phases. And successful retirement is about preparing for both. Both require different approaches. It is also very important to manage the transition from one phase (before retirement) to the next (after retirement) smoothly.

Part 1 of Retirement (Accumulation)

This phase is when you keep putting aside money for retirement. Depending on when you start working (saving) and then stop working, this phase can last for 25 to 40 years!

The agenda in this phase should be to first set a realistic retirement corpus target and then to invest regularly to accumulate the target, which will, later on, help provide income during retirement years.


There are several investment options available in this phase. But in my view, just a few of them are suitable for retirement like Provident Funds (Employees’ Provident Fund + Voluntary Provident Fund, Public Provident Fund), National Pension System, equity funds and so on. And it’s not just about picking suitable products but also about having proper asset allocation. Ideally, retirement is a long-term goal for most so it’s advisable to have a major part of investment in equities to generate inflation-beating returns.

During this phase, you will have several other goals competing for your savings too, like children’s education, house purchase and so on. So a good financial plan will take care of all these together with the goal of retirement planning.

Part 2 of Retirement (Distribution)

This phase isn’t discussed much because it’s applicable only to those who have already retired or are about to. It begins when you stop working (so no salary) and start using the retirement corpus that you accumulated in the previous phase, to generate an income stream to pay your expenses.

A good retirement plan, during the distribution phase, will focus on ensuring that the income from the corpus and expenses are managed in such a manner that the corpus does not get exhausted too early.

So you can say that this is the time for which you were preparing for all your working life and when all your savings and investments would start supporting your post-retirement lifestyle.

Transition from Phase 1 to 2

Many people think that they can suddenly move from phase 1 to phase 2. That is not true. And it can really hurt your finances during the post-retirement years.

Let’s say you start with an equity-heavy portfolio during accumulation and avoid de-risking as you get closer to your retirement.

Now as detailed in this article on Sequence-of-Return risk, an ill-timed market decline can be disastrous, especially for an equity-heavy portfolio near retirement. After retirement, you have to withdraw from the corpus to meet expenses. And if this withdrawal happens during the bad years, then the corpus faces the double whammy and would get depleted very quickly as it’s going down with the markets while you are withdrawing money from it.

How to manage Investments in Phase 1 & 2?

Suppose you are a 35-year-old who wants to start his planning to retire at 60. This is how your retirement planning should work:

Phase 1 (Age 35 to 55)– Since you are already contributing towards debt in the form of EPF, it’s time to invest heavily in equity. You can follow an asset allocation of 60-70% equity and the rest in debt. For equity, choose SIPd in diversified equity funds (active and passive funds). Every year or two, rebalance it back to optimal levels to manage risks.

Transition Phase (Age 55 to 60)– Gradually start reducing equity allocation during this period. It can be done in a linear manner like from 70% at age 55 to 60% at 56, 50% at 57, 45% at 58, 40% at 59 till (let’s say) 30-35% at 60. Or you can do this reduction based on market conditions then.

Phase 2 (Age 60 onwards) – You can follow a 2-bucket strategy as explained here in how to generate regular income from a Rs 2-crore retirement corpus. Bucket 1 takes care of regular income needs for the first 9-10 years. The rest in Bucket 2 gets invested for growth, primarily in equity instruments, to generate inflation-beating returns.

As it would be clear by now, both phases of retirement are to be played with a different set of rules. So make sure that you have a proper retirement strategy that is designed to adapt and change with the phases. And if you are unsure whether what you are doing for retirement is right or wrong, then please consult a capable Investment Advisor.
Dev Ashish is a SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor
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