Wise Wealth Advisors

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

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Balanced retirement

Posted by Muthu on January 21, 2016

We wrote in the past how a predominantly equity portfolio (90:10; Equity: Debt) can provide good yearly withdrawals and also leave decent wealth for next generation.

I’ve also mentioned that during retirement, you should have minimum 60% and maximum 90% in equity.

Some may prefer 20:80 (Equity:Debt) combination; like MIPs (Monthly Income Plans). After withdrawals, this may not have any capital appreciation to leave for next generation. The corpus would remain as it is. But for conservative investors preferring less volatility, this would be a suitable asset allocation.

60:40 (Equity:Debt) is a good asset allocation for most of the investors most of the time, especially during retirement.

During asset accumulation phase, for all long term goals, you can even be 100% in equity. This is after taking care of risk covers, emergency fund and due allocation for short and medium term needs. As I’ve mentioned yesterday, our family asset allocation is now 90:10, a predominantly equity portfolio.

For asset withdrawal phase or retirement, I would prefer a 60:40 asset allocation. I was mentioning this to fund house officials who came to meet me yesterday. They had some interesting workings to share with me and hence this piece.

Balanced funds in India are the closest you can get to 60:40 portfolio. To get the benefits of equity funds; they invest 65% in equity and 35% in debt. Instead of going for separate equity and debt funds, the advantage of going for balanced funds is that it is automatically balanced periodically. Automatic rebalancing is a good discipline and tax efficient as well.

Like equity funds, the long term capital gain on balanced funds is also zero.

Let us take a balanced fund with over 2 decades of history, Birla Sun Life Balanced’95.

Let us assume you invested Rs.10 lakhs in this fund on 01/01/1996. To avoid exit load and also get the benefit of long term capital gains, let us assume you started withdrawing Rs.10,000 every month (withdrawal rate of 12% per annum), from the 13th month. As on December 31’st 2015, over 20 years of investment period & 19 years of withdrawal period; you would have totally withdrawn Rs.22.80 lakhs. After withdrawing 12% per annum, the value of your corpus as on 31/12/15 is a whopping Rs.3.84 crores. Despite 12% withdrawal every year, your initial corpus has multiplied by 38 times.

I looked for the last 10 years data which I felt would be more realistic and give an idea about future.

Let us assume you invested Rs.10 lakhs in this fund on 01/01/2006. To avoid exit load and also get the benefit of long term capital gains, let us assume you started withdrawing Rs.10,000 every month (withdrawal rate of 12% per annum), from the 13th month. As on December 31’st 2015, over 10 years of investment period & 9 years of withdrawal period; you would have totally withdrawn Rs.10.80 lakhs. After withdrawing 12% per annum, the value of your corpus as on 31/12/15 is a decent Rs.19.75 lakhs. Despite 12% withdrawal every year, your initial corpus has doubled during the last 10 years.

As I wrote last week, as inflation and interest rates are going down, the nominal future returns for various asset classes also would fall. However please note that there would not be any change in real returns.

If inflation settles at 4%, fixed deposits may provide 5%. MIPs may deliver around 7%. Balanced funds may provide around 11%. Equity funds may deliver around 15%.

Assuming above returns over the long run in future, SWP (Systematic Withdrawal Plan) rates may be as follows; MIPs-5%, Balanced Funds-7% and Equity funds-10%. These withdrawal rates would ensure that there is capital appreciation in addition to withdrawals.

Please note that none of the above are guaranteed returns. They are given for illustrative and understanding purposes. Actual returns may vary.

If inflation and interest rates rise in future, nominal returns also would increase.

A 60:40 balanced asset allocation during retirement would give decent withdrawals, have lesser volatility than equity and also provide for capital appreciation.

Most of you are in asset accumulation phase now.

Whatever I’ve said above would be applicable during your retirement phase.

One Response to “Balanced retirement”

  1. Ashwin Thenappan said

    I had a a similar query which I posted in a facebook group. The link for that is https://www.facebook.com/groups/asanideasforwealth/951780611559499/ . is metho

    Why do not many of the financial experts convinced with this method for retirement.

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