SEBI-registered flat fee-only advisor Swapnil Kendhe discusses a way to manage your corpus after financial independence and early retirement. This is a sequel to his recently published article, The pitfalls of conventional retirement planning calculations.
About the author: Swapnil is a SEBI Registered Investment Advisor and is one of the sought-after advisors on the freefincal fee-only financial planners’ list. You can learn more about him and his service via his website, Vivektaru. His story: Becoming a competent & capable financial advisor: My journey so far.
As a regular contributor here, he is a familiar name to regular readers. His approach to risk and returns is similar to mine, and I love the fact that he continually pushes himself to become better, as you see from his articles:
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- The pitfalls of conventional retirement planning calculations
All investors have legacy portfolios. There are real estate, PPF, EPF, NPS, FDs, Gold, Stocks, PMSs, different schemes of Mutual Funds, different asset allocations, different corpus sizes, and different risk tolerance levels. Portfolio realignment decisions are never straightforward.
Therefore, the discussion that follows in this article only provides a simple framework for investors to think about managing their corpus post-FIRE. Do not blindly implement it.
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Mr Agni is a 45-year-old married man with a 10-year-old daughter. He owns a house and has accumulated a corpus of ₹6 crores in a job that involved working long hours on the laptop.
Agni has quit this job to pursue his lifelong interest in art, music, and literature. He will depend on his corpus for his expenses for the rest of his life.
Agni is a simple man with simple tastes in life. He wants to keep things simple and spend minimal time and effort on portfolio management. Agni wants to understand how he can manage his corpus.
Broadly, Agni must decide his –
- Equity portfolio
- Debt portfolio
- Asset allocation
- Rules for making withdrawals from his corpus
- Equity portfolio – The simplest and arguably the best product for Agni would be a low-cost Nifty Index Fund. Through this product, Agni would always hold the stocks of the biggest 50 listed businesses in India by free-float market capitalization. It eliminates the fund manager risk for Agni. There will be market risk, but he can manage it at the asset allocation level.
- Debt products – Money Market Funds could be the simplest option for Agni for debt allocation. There is low credit risk and low-interest rate risk in Money Market Funds. In Money Market Funds, Agni will pay tax only on the realized gains, which can keep Agni’s income below the taxable income limit.
- Asset allocation – For asset allocation, Agni can follow Benjamin Graham’s 50:50 Equity: Debt allocation with a 5% threshold for rebalancing.
- Rules for making withdrawals from the corpus – Agni wants to set aside 60 lacs for his daughter’s higher education and marriage. This leaves him with a 5.4 crore corpus for his lifestyle expenses.
Agni can assume that the post-tax real return (return over inflation) from his portfolio for the entire duration of his remaining life would be close to zero.
With zero real return assumption and life expectancy of 90, Agni’s affordability for his annual lifestyle expenses at age 45 would be 5.4 Crore/45, i.e. 12 Lac. Likewise, he can calculate his affordability yearly by dividing his corpus by remaining years in retirement, assuming a life expectancy of 90.
Agni can certainly spend more than the calculated affordability during the initial years of his FIRE, in which he may travel more. But he must be ready to cut expenses for a poor return sequence.
Agni would make all his withdrawals from Money Market Funds. He would rebalance the portfolio to his target allocation of 50:50 if equity allocation in his portfolio breaches 45% on the lower side or 55% on the upper side. This simple rule allows him not to touch equity during market corrections. He would purchase more equity during market corrections and book profits in raging bull markets.
Agni does not need to maintain a separate emergency fund since his portfolio has enough liquidity to handle emergencies. He does not even need to run a separate portfolio for his daughter’s higher education and marriage goals. He can very well make withdrawals for these goals from his unified portfolio.
At around age 70, Agni can use a part of his portfolio to purchase an annuity, eliminating the longevity risk. At higher ages, annuity rates without return of premium annuity options are significantly higher than debt return. Annuity gives income flooring which provides psychological comfort to spend a little more on discretionary expenses.
P.S. Can’t Agni park his corpus in a dynamic asset allocation fund and withdraw from it for his expenses? After all, a fund manager is better equipped to manage portfolio asset allocation than him.
Agni is not dynamically managing the asset allocation of his portfolio. He has decided on a target allocation and trusts Benjamin Graham’s time-tested rebalancing framework. Even William Benjen’s 4% SAFEMAX withdrawal study had a fixed 50:50 Equity: Debt allocation rebalanced annually.
Dynamic asset allocation products have significant equity allocation. Systematic withdrawal from products with significant equity allocation is a bad idea. During market corrections and bear markets, you sell equity when you should stay invested in equity. Markets may recover subsequently, but there would be a lower equity base to benefit from.
There is fund manager risk on the equity side and potential credit and interest rate risk on the debt side in dynamic asset allocation funds. You also pay higher expenses for these products on the equity and debt sides.
There is no need for Agni to trust a fund manager. He can manage his portfolio better on his own.
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