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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Equity during retirement

Posted by Muthu on September 20, 2015

Most people (including advisors) think that equity is useful only for creating wealth during asset accumulation phase. They don’t consider equity much during asset distribution or retirement phase.

Retirement is not an event at a single point of time (say like daughter’s wedding). Retirement is usually spread over 20 to 30 years.

Assume you retire at 50. Your monthly expense is Rs.1 lakh a month and life expectancy is 80 years. Applying our thumb rule of financial independence, let us assume the retirement corpus to be Rs.3.6 crores (30 years * 12 months * Rs.1 lakh) in financial assets in addition to owning a house and not having any debt.

First step is to keep 3 years expenses in a liquid fund. So 36 lakhs is kept aside. The remaining Rs.3.24 crores is invested into few diversified equity funds (no sectoral or thematic funds).

Based on the past performance and our faith in the future, we expect equity funds to deliver around 18% annualised returns over long run. For the first few years, out of the corpus of Rs.3.24 crores, you need only Rs.12 lakhs a year. This works out to 4% withdrawal from the corpus. Whereas the corpus continue to grow at 18%. So even after withdrawals, it grows at 14%. From 4th year, you increase the withdrawals to say Rs.15 lakhs a year, accounting for inflation. As your corpus has increased, still 4% withdrawal would take care of the increased cost of living.

By this way, you can keep growing your retirement corpus and keep the withdrawal percentage almost constant. As you are aware, markets are volatile and would not give you a fixed 18% every year but only over a period of 10 years or more. This is where your liquid fund plays a role. You can withdraw from equity funds regularly in bull markets, sideways market and even in bear markets. If and when there is a huge crash of 30% or more, you can temporarily stop the withdrawals from equity funds and instead do the same from liquid fund. Please note that the liquid fund also would continue to grow in line with inflation.

Also in bull markets, the liquid fund needs to be topped up again to match the then 3 years living expenses.

This is not difficult to implement and a good advisor can guide and service you according to your life situation and market conditions during your retirement.

The advantages of opting this method in retirement is that you would never run out of corpus. Your corpus would outlive you. Not only that in addition to enjoying a comfortable and secure retirement, you would also leave a huge wealth for next generations. That’s the power of equity and this method.

People who understand the power of equity use the same in retirement phase as well.

We will.

3 Responses to “Equity during retirement”

  1. expectation of 18% return is too high.

  2. mahesh said

    an excellent way to cater for sustained cash flow in retirement.however,more conservative rate of 15-17% returns would make the analysis more relevant.

  3. […] you remember, I wrote a piece two months ago on how equity is essential not only in accumulation phase but also during […]

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