A subscriber to our YouTube channel asks, “Assuming we retire at the age of 60 and live up to 85 years. I have been investing in the NIFTY 50 Index since age 30. Can I not hold NIFTY 50 even in retirement for a consistent passive income through SWP? Seasoned investors in the USA do that with the S&P 500. And there is no such analysis available for NIFTY 50. Might be worth making a video about this”.
The first consideration is, “How much equity should I hold after retirement?” As many of our retirement planning illustrations with the freefincal robo advisor has shown, we recommend not more than 20%-40% depending on when we started investing, the corpus we have etc.
So we need to find out how strong a retirement corpus is. Is it capable of generating an income that can increase with inflation in retirement? Should you buy a pension with most of your assets, or can you afford to put them in different buckets and manage them actively? You can use the freefincal robo advisor tool backed by years of research and practical assumptions to find out.
Illustrations
- Retirement plan review: Am I on track to retire by 50?
- I am 30 and wish to retire by 50 how should I plan my investments?
- Can I retire by age 55? Retirement Planning Case Study
- Case Study: Achieving Financial Freedom for Early Retirement
- How should I plan if I want to retire in 20 years?
- Is it possible to combine a bucket strategy with income laddering after retirement?
A safe thumb rule is, (assuming the corpus is larger enough) invest some portion in growth assets (equity, equity funds, hybrid funds) and some portion in fixed income assets. To mitigate sequence of returns risk, we recommend inflation-index growth from fixed income assets with near-zero risks for the first 15 years in retirement.
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A second safe thumb rule is, never to set up a SWP from a fund in which the NAV is volatile (e.g. equity funds, so-called balanced advantage funds, aggressive hybrid funds, etc., are to be avoided).
If the NAV on the date of redemption is low, more units will be redeemed, and the investment will deplete faster. If the downward trend continues, the entire corpus could be exhausted sooner than anticipated.
Many backtested illustrations with equity funds, aggressive hybrid funds, and balanced advantage funds (ignoring that investment mandates keep changing) claim that the SWP worked even during the worst sequence of returns. This is laced with hindsight bias because we know when the market recovered and did not factor in the journey when the corpus depleted rapidly. It can be quite stressful in real-time as the future is uncertain, and we may not have enough corpus to take on such a risk.
We recommend using only liquid, overnight, and money market funds for regular withdrawals. You can make occasional withdrawals from equity-oriented funds for discrenationary expenses when the market has done well.
Ps. Like a SIP, an SWP is unnecessary (the same goes for the STP, too!). If you want to invest in a mutual fund each month, do so manually on any day of the month that is convenient for you. If you want to withdraw from a mutual fund, do so whenever you like!
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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