Retirement planning in India is going through a major shift: Are you ready?

Published: December 27, 2022 at 6:00 am

Last Updated on January 5, 2023

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.

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    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?

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      Pattabiraman editor freefincalDr 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 nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or 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.
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