Conventionally, our fathers and forefathers have been extremely conservative, it is only now we have opened up to a variety of investment avenues. Many of us have grown comfortable with the risky investment avenues and often ignore the need to conduct strategic realignment at regular intervals.
It is necessary to reduce your portfolio risk as you approach retirement. It is apparent that as you approach retirement, your ability to put your corpus into risky assets gradually reduces.
Reasons for the need for strategic re-alignment for reducing portfolio risk:
- Severe drawdown in markets could deplete your corpus:
As you approach retirement, your appetite for risky assets goes down. One sharp downtrend could wipe away a large portion of your corpus if held in risky assets, the timeline may not support your endeavour to build the corpus to its earlier levels.
- Withdrawals need to be systematic, cannot be strategic:
Post-retirement, your corpus should support your household needs. You may be required to make strategic withdrawals (cannot be timed for market peaks etc.,) from your corpus to continue your lifestyle post-retirement.
- Inability to take financial stress:
Any financial stress can be detrimental to your health, hence, in this fragile state of mind and age, it is best to keep a safe portfolio. Lower stress levels are critical for peaceful and healthy retirement life.
- Need for liquid funds to cater to emergencies:
As we age, we are more vulnerable to illnesses and medical emergencies. Hence, it becomes necessary to build an emergency fund that can help you fund these medical expenses and hospital bills.
- Predictable cash flow to enable stress-free golden years:
The corpus that you build over your working years should be such that you can create a monthly cash flow that enables stress-free golden years.
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Challenges in making your portfolio retirement ready:
A. Living off returns from your corpus:
In the ideal world, you need to build a corpus that will provide you with enough returns to create a steady cash flow. This will ensure that your corpus does not erode over your lifetime.
However, this is very tough to achieve, given that the returns and inflation rates are not consistent and your set of assumptions could have been completely off the mark. It is important to create enough buffer in your corpus and make realistic assumptions.
B. Evolving markets, sharper drawdowns:
The market and the macroeconomic scenario is constantly evolving. The peaks are unprecedented and the troughs are very steep.
No amount of portfolio protection with hedging and diversification may be enough at certain times. Hence, requiring a well-calibrated approach to portfolio alignment as you approach your retirement.
C. Evaluation of your post-retirement lifestyle:
This is one of the most important aspects that you will have to project. It is not very easy to comprehend how you intend to live life 10, 20 or even 30 years down the line.
On a broad basis, you will be required to identify the expense centres that will continue to stay critical post-retirement. There may be certain expense centres that may gain prominence for example medical assistance, healthcare-related expenses. The corpus should be aligned to the requirement at that point in time.
Pointers for asset allocation as you approach retirement:
- Reduce equity-oriented assets:
As you approach your retirement, you will have to strategically move your equity corpus into a debt instrument. This has to be done over a longer timeframe. It may be imprudent to move your equity assets at one shot, you will have to carry out this activity in phases. The exits from equity assets should be during an up-trending market.
- Create enough emergency funds:
You may move part of your equity funds into a debt fund which could serve as an emergency fund. It would help you deal with medical emergencies which may arise in the future. Having emergency funds is of utmost importance during retirement.
- Hedge your health and life risk:
Health risks are higher as you age, during your working years you should look for plans which will provide coverage for your post-retirement when health insurance will be necessary. The sooner you avail of the plan, the waiting period would be over and benefits would be available when you need it the most. It is also prudent to avail of a life risk early on in life which offers coverage up to maximum age.
Hope this brief note helps you plan your retirement portfolio in such a manner that it helps you have peaceful golden years. If you need any further assistance or clarification, please feel free to contact the experts at Tata Capital Wealth and we will be happy to assist you.