Money moves close to retirement

Create a debt-heavy portfolio with adequate liquidity. Keep 30 per cent in equities

Retirement comes with its own set of challenges. But if you are retiring during a slowdown, the challenges may just increase a little more. And those invested in equities would also be a worried lot. Friday’s 5.32 per cent (around 2,000 points) jump after Finance Minister announced deep cuts in corporate taxation might be a relief, but the benchmark index is up only 2.4 per cent during the past year. And we are far away from being a booming economy.

Usually, personal finance advisors suggest gradually lowering equity exposure closer to retirement, but maintaining a portion in good quality stocks or mutual funds can add sheen to the portfolio. Says Joseph Thomas, head of research, Emkay Wealth Management: “While the majority of the portfolio should be moved into fixed income instruments, equities should not be ignored completely.”

“One of the biggest mistakes most people do with their retirement corpus is being too conservative. Though, there is a fall in the risk appetite post-retirement, playing completely safe may affect the future sustainability of the invested money. What investors need to do is maintain a balance between their equity and other safe assets,” says Sanjeev Govila, CEO, Hum Fauji Initiatives.

Ensure adequate liquidity: If you are retiring during the economic slowdown, you must not panic, instead, take an immediate step to secure near-term liquidity needs. “The best way to invest for liquidity is to know your money needs over the coming months/years. This makes it easy to plan for liquidity, as and when the need arises. Ensure a good chunk of the money is in liquid avenues for emergencies, avail the benefit of SWP (systematic withdrawal plan) option,” says Santosh Joseph, Founder and Managing Partner, Germinate Wealth Solutions.

Maintain emergency corpus: You must always be prepared for medical or financial emergencies. Hence, setting aside an emergency corpus should be a priority. “Ideally, one should maintain a minimum of 20 per cent or more of the retirement corpus for emergencies. Having abundant liquidity is a priority for retirees. During slowdowns, there could be times when many asset classes can become highly volatile or completely illiquid, like real estate,” says Joseph. Another way of doing the math for an emergency corpus is to calculate your monthly expenditure and set aside 6-12 months’ requirement in a separate corpus which can be accessed immediately. This could be in short-term bank fixed deposit or liquid mutual funds. Determine asset allocation: Asset allocation for post-retirement varies largely based on the individual’s finances. “If the individual has pension income, earning some consultation fees or paying rent or just a big corpus, all these have to be factored in while deciding asset allocation. It is prudent to build a combination of cash, fixed income and equity for a stable portfolio,” says Joseph. Govila says though each would have different needs, the following asset allocation could act as a starting point:

Debt-equity ratio of 70:30 for regular monthly income generation investments.

Equity mutual funds for financial goals occurring beyond five years.

Bulk in debt mutual funds/bank fixed deposits/corporate fixed deposits for financial goals occurring before five years.

Diversify portfolio: As you approach your retirement, you should ideally shift towards a debt-heavy portfolio. “Equity dominant portfolios should be trimmed around onetwo years ahead of retirement and tactically re-oriented for lower risk, higher stability

and liquidity. Reducing exposure to equity and moving to a combination of fixed income, dynamic equity funds with auto asset allocation funds would be ideal. Being diversified across categories of assets like cash, gold, fixed income and equities will help manage volatility in assets and optimise overall portfolio,” says Joseph. However, real estate as an investment should be avoided since it is highly illiquid.

Stopping your systematic investment plans (SIPS) during an economic slowdown is perhaps one of the biggest mistakes you can make. “A good goal-based planning followed by a disciplined SIP approach, irrespective of the market scenario, will definitely. Continue with the SIPS if the same can be afforded,” says Govila. Thomas says the economic downturn could also be seen as an opportunity to plan investments that will reap rich returns in the future. “Cyclicality brings ups and downs in economic activity. Such cyclicality should be effectively used as an opportunity to make investments and benefit when there is revival in economic activity and therefore, in markets and economy.”