Retirement income framework – understand the allocation

I get a lot of queries in my blog and Facebook group about how to structure a corpus so that the retired person gets enough monthly income in retirement. Most of these people have a home and are not really extravagant in their spending. Ideally they would like to have regular monthly income with a degree of safety attached to it.

I have written earlier that a combination of Debt, Equity and Stocks should be the way to go for all stages of life, with the provision that the proportion changes in favour of debt as you grow older. However, there are many people who are worried about the volatility in the markets and clearly uncomfortable in a scenario where they might have to withdraw money in a declining market. At the same time, a debt only portfolio will work if the corpus is large enough to deal with inflation over a period of 3 decades.

Let us simplify it then in terms of different scenarios. The first scenario is where you only want to have Debt in your portfolio:-

  • Assume an annual expenditure of 8 lacs per year
  • Retirement period of 30 years conservatively
  • Real return from portfolio is zero as Returns match inflation
  • Corpus needed will be 2.4 crores
  • Rough assumption is that expenses will double every 10 years.

So you can see from here, if you have 2.4 crores corpus you can withdraw 8 lacs every year and not worry at all about markets and equity etc. But what if you do not have 2.4 crores but only 2 crores. How does that change the situation? Let us see below:-

  • Assume same expenses and longevity as in the first scenario.
  • Put 20 years amount into Debt and the rest in Equity.
  • So we have 160 lacs in Debt and 40 lacs in equity.
  • Assume that inflation makes expenses rise by 100 % in 10 years.
  • Assume equity returns of 15 % annually.
  • The Debt investment will be adequate for first 20 years.
  • The Equity part will become 654 lacs in 20 years at 15 %
  • Even if you take 12 % return on equity, the amount in 20 years will be 386 lacs.
  • Annual expenses after 20 years will be 32 lacs per year
  • So 10 year costs are 320 lacs.

As you can see the trick is to let Equity grow for a long time so that the differential return when compared to inflation really works to your advantage.

I hope with this you will be able to get your own situation in retirement mapped out. The basic idea is to deal with Debt in the first decade or two and have access to equity money for later on. Yes, if you have enough in Debt then you probably do not need a lot of equity allocation. Let us now look at the general formula then.

  • Expense of X lacs per year and longevity of Y years
  • You can be in pure debt if corpus available with you is more than XY lacs
  • If you have less than XY lacs then your allocation must be between Debt and Equity.
  • In general with a corpus of 75 % of XY lacs you should be all right.
  • Assumption is that your Equity portfolio grows at 12 % to 15 % long term and inflation is such that your expenses double in 10 years ( roughly 7.2 % )

All that you really need to do now is to plug in your values and check out the allocation required for a rich and productive retirement. I will do another post this week on specific portfolios and withdrawal strategies for 2 different levels of corpus.

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3 thoughts on “Retirement income framework – understand the allocation

  1. Do you have any post which talks about debt portfolio in detail? As in, what kind of investments are included in debt portfolio? Thanks, keep writing. You provide inspiration and help build strategy.

    Like

  2. Sir,
    I am a big fan of your writings.
    Please do a post on ER in india(Early retirement) keeping 40 years of age.
    What should be the persons strategy here, In US i have read mostly 4% rule but not sure how that will be applicable to India, Is there a 2% or 3% rule for here.
    Thanks

    Like

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