Retiring soon? Time to take a hard look at your asset allocation

Kiran TelangIt is not yet common to find investors who are about to retire or who have retired to have a favourable outlook towards equity in their portfolio. As a nation, we are not big equity investors, be it through direct buying of stocks or using mutual funds, more so with respect to a retirement portfolio.Mr. Raman was to retire in six months when he decided to liquidate all his investments and move it to bank and company fixed deposits. He was of the opinion that with no income through salary he would want a regular predictable income for daily living. While this gave him the peace of mind knowing what amount would come when into his account, he faced a rude shock when interest rates started falling. He was forced to renew his fixed deposits at lower rates that fetched him lower interest. At the same time the expenses kept on increasing, right from the salaries to the domestic support staff to groceries and vegetables. This had him really worried about managing his expenses over the years. On the other hand, Mr.Mahesh had some money in his mutual funds that, he had invested in the few years before his retirement. He left those funds as it is. He used bulk of his retirals to invest in fixed deposits, annuities and postal schemes. Since last year, he has noticed that his portfolio of mutual funds has not given any returns. He is also worried about events like Brexit which might drive this portfolio into negative, so he is looking at liquidating that portfolio and moving it to safer avenues. Mr.Mahesh is looking at the near term performance of his portfolio and impact of events, but is missing out the fact that he might be in a lurch if all his money is in fixed income products like those of Mr.Raman, with the risk of getting renewals at lower rates. He had made a good decision not to liquidate his equity assets when he retired, but he might be committing an error by turning back on his decision based on short term results. It is this part of his portfolio which will help him when income from fixed income instruments starts falling short.Retirement is always a conundrum with respect to money. As such there are emotional upheavals due to the transition, and money management adds to the anxiety. For most people, the retirals that they receive from their employers in the form of provident fund and gratuity is perhaps the largest chunk of money they have ever seen in their working lives. They are likely to make emotional decisions like giving money to their children to help them purchase property or start their business. They might also be tempted to protect the corpus by locking it into fixed income instruments that will give a lifelong cashflow. Without a proper analysis of their own requirements, it would be unwise to take quick decisions about utilizing their retirement money. Several aspects need to be taken into consideration including the monthly cash requirement, their health conditions, tax liability and the lifestyle that they would want to adhere to. A crore might seem like big money in the account, but unfortunately it is difficult to generate even Rs.50,000 per month from this corpus if you look at the various aspects mentioned above.As an example let us see some numbers, say a starting corpus of Rs.1 crore invested 75% in fixed income instruments and 25% in equity instruments. The assumptions are your fixed income corpus gives you 1% return over inflation (post tax) and equity corpus gives you 12% per year. If you wish to draw an income of Rs.50,000 pm from this corpus, you are likely to fall short of your requirements from your fixed income portfolio in year 14. You can dip into your equity portfolio which has been untouched for these 14 years, but still you will run out of money in year 22. To have an income for 30 years you will need to reduce your expenses to about Rs.41000 per month. You can imagine what will be the situation if you park your entire money in fixed income instruments.The above example has no provisioning for unforeseen circumstances like a major illness. It also assumes a linear return on equity portfolio. Equity never moves in a linear fashion, the returns are usually lumpy. Sometimes your portfolio might be negative sometimes it may show superlative returns and in between it might just languish. So if you are retired or nearing retirement, take a serious look at your investment portfolio. Don’t go overboard with investments in one asset class. Look at creating a proper asset allocation to help you generate income that you desire. If you have equity in your portfolio, do not go by short term results, look at it on in the long term purview of your retired life of 25-30 years. That is a good time frame to hold on to equity investments. As far as giving to your children is concerned, I believe most youngsters today will be happy if their parents are independent in their retirement. You must strive to create wealth through judicious investments on your portfolio even in retirement. Eventually any wealth that is created by you and is unused, will go to your children.Apart from having a good asset allocation, it is also important to monitor the portfolio on a regular basis and keep it aligned to your goals, especially in case of impact of external conditions that are beyond your control, like change in taxation etc. More than that, it is important to monitor your own impulsive behaviour to frequently change the position of your investments without giving due importance to your long term goals. If you look at the bigger picture, you will not worry so much about the equity component of your portfolio even in bad times.Kiran is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.