Last Updated on January 5, 2023 at 6:46 pm
Over the last decade, the number of capital market participants (stocks or mutual funds) has increased sharply. Retirement corpora have gradually shifted from 100% fixed-income to higher and higher equity exposure. This shift implies both retirees and advisors must be mentally prepared to face big challenges.
An extended rate cut for a good part of the last 7-8 years combined with an equity bull run has seen both young and old investors flock to equity. Of course, their mettle will be severely tested by the current rate hikes and poor stock market returns. Nonetheless, it should be clear that retirement assets will be more and more market-linked in the future.
The problem with this is all of the usual propaganda, like the “power of compounding” and “be patient and stay invested”, are all out of the window after retirement (they do not apply even before). See: Don’t get fooled: Mutual funds have no compounding benefit!
A small exposure to equity (10-20%) may not need a big difference in mindset; this is probably where we are today (on average). In future, this exposure is only going to increase.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Today we have enough data that a 4% withdrawal rate (annual income in the first year of retirement divided by corpus available at the time of retirement) is not good enough. So advisors recommend using less than 4%. See: The 4% retirement rule is wrong! Do not retire early in India (or the US) based on that!
Planning for less than 4% withdrawal is relatively easy when retirement is far away. See, for example, I plan to retire in 25 years, what should be my safe withdrawal rate? And I am 30 and wish to retire by 50 how should I plan my investments?
But should a retiree with a 4.5% or 5% withdrawal rate do? Should she avoid all market risk and embrace annuities? How much risk can she afford? These are uncharted waters in the Indian markets.
Advisors are barely qualified in this area, and their practical experience is far lower. It is one thing to allocate equity for someone with a 40X corpus and quite another with a corpus of 20X (X = annual expenses in the first year)
DIY investors also have to be careful. They cannot assume that managing retirement buckets will be easy because they have capital market experience. We have shown that the best way to combat the sequence of returns risk in retirement is to increase equity exposure gradually (yes, you read that right!)
We are not suggesting that the reliance on pension or senior citizen saving schemes will reduce dramatically. They will stay as strong as ever. Just that the market-linked capital will increase, and this requires special attention. Not just where we invest but also how we manage the portfolio. We have various bond options and debt mutual funds in the fixed-income space. This also requires cautious investing.
How should advisors prepare?
- Simulate difficult scenarios with 5% or 6% withdrawal rates.
- Run backtests on these plans with past market return sequences and see how they hold up.
- How big a chance are you willing to take wrt to extreme circumstances?
- Define a limit when you only advocate annuities with no capital market risk.
- Many of the above may or may not be found in your certification syllabus.
- Advisors must be open-minded and willing to learn and explore new avenues.
How should investors prepare?
- Don’t be overconfident about equity or debt mutual fund exposure after retirement.
- Can your portfolio handle 5-10 years of zero/negative equity returns?
- What is your fallback option?
- Learn to stress test your retirement portfolio (before you retire).
- Learn to manage a retirement bucket strategy (before you retire).
- Build a second source of income.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
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 ten 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 investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 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 is!! 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.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)