In the last two blogs, we understood 1) how to calculate the required retirement corpus? 2) How to achieve the retirement corpus. Now this blog will talk about how to make the retirement corpus work for us. It is important to have a clear idea on how the retirement corpus will work for us. The key strategies being used for this are –
- Asset allocation
- Balance of instruments for inflation protection and cashflows
- Systematic withdrawal plan
Before we get into the asset allocation part, it is important to clearly list down the different assets which are available at that point of time. Assumption is that the investor does not make any new real estate investments. The real estate holdings provides extra cashflow for the investor.
| Investment Product | Expected Returns |
| Savings Bank | 3.5% |
| Post office MIS – Wife | 6.2% |
| Post office MIS – Husband | 6.2% |
| Senior Citizens Savings Scheme – Wife | 7.4% |
| Senior Citizens Savings Scheme – Husband | 7.4% |
| State Development Loans – Bonds | 7.75% |
| GOI Bonds (including floating rate bonds) | 7.5% |
| Debt MF | 7.2% |
| Gold Bond Fund | 2.5% |
| Annuity Products from Insurance companies | 6% |
| Mutual Funds / Stocks | 12% |
Asset Allocation
It is important to understand the risk associated with the investments listed vs their expected returns. Shortfall risk is the risk that our investments are falling short of supporting us during our retirement. Longevity risk is that we live longer than our investments. So our investments should right mix of both inflation protection and principal protection with good tax advantages.
Inflation protection – Equity mutual funds, Stocks, Rental Incomes, Gold Bond Funds and Floating Rate bonds provide the inflation protection.
Capital protection – State Development Loans (State bonds), GOI Bonds, Debt Mutual Funds and other Fixed Income schemes (Deposits) provide the capital protection and the frequent cashflows.
Some tips – 1) So allocate funds for later period of retirement into equities, giving them really long run to grow and provide the inflation protection. 2) Systematic withdrawal plan from equities 3) Create cashflows from deposits which cover first 3 years of retirement.
An example of a conservative retirement portfolio is given below. Note that only ~20% of the Portfolio is invested in Equities, which provides good inflation protection at lesser overall risks.
| Investment product | Investment | Portfolio Weight | Returns | Weighted return | Actual Returns on first Year |
| Bank FD + Savings | ₹ 678,000.00 | 2.26% | 3.50% | 0.08% | ₹ 23,730.00 |
| POMIS – Wife | ₹ 450,000.00 | 1.50% | 6.20% | 0.09% | ₹ 27,900.00 |
| POMIS – Husband | ₹ 450,000.00 | 1.50% | 6.20% | 0.09% | ₹ 27,900.00 |
| Senior Citizens SS – Wife | ₹ 3,000,000.00 | 10.01% | 7.40% | 0.74% | ₹ 222,000.00 |
| Senior Citizens SS – Husband | ₹ 3,000,000.00 | 10.01% | 7.40% | 0.74% | ₹ 222,000.00 |
| SDL – Bonds | ₹ 2,000,000.00 | 6.68% | 8.00% | 0.53% | ₹ 160,000.00 |
| GOI – Bonds | ₹ 2,000,000.00 | 6.68% | 7.54% | 0.50% | ₹ 150,800.00 |
| Debt MF | ₹ 4,000,000.00 | 13.35% | 7.00% | 0.93% | ₹ 280,000.00 |
| Gold Bond fund | ₹ 1,500,000.00 | 5.01% | 2.50% | 0.13% | ₹ 37,500.00 |
| Annuity products | ₹ 6,000,000.00 | 20.03% | 6.50% | 1.30% | ₹ 390,000.00 |
| Mutual funds/Equity | ₹ 6,882,000.00 | 22.97% | 12.00% | 2.76% | SWP based on markets |
** Depending on the willingness of the investor to take risk, the investor can invest (100- investor age)% in Equities – this is a normal thumb rule.
The detailed calculation excel is available in the downloads section (coming soon).
