Everyone works hard to accumulate wealth to build a good retirement corpus and lean on it for the rest of their life, wishing to make a living out of the returns from this money.

But this desire becomes a nightmare when a person has to retire when the world markets stand on the brink of recession and soaring inflation. The situation would be like sailing a boat helplessly through a shark-infested violent sea amid never-ending thunderstorms. You may either get eaten by sharks or thrown to sea and drowned to death.

The first few years of the market performance play a vital role in the retirement corpus. If all is well, a retiree can sit back and relax; if not, negative market performance plus high inflation eats away a bigger chunk of their retirement portfolio. Consequently, the retiree’s confidence in his retirement planning will shatter.  

Of course, if your retirement is near, chances are less that it will always coincide with bullish market conditions. Therefore, Alpha Capital has come up with an analysis that can comfort individuals approaching retirement soon. The research shows that the people who retired during the subprime mortgage crisis in 2008, one of the worst times in financial history, are doing perfectly fine even today.

People stepping into retirement usually have around 50% allocation in equity assets to bring double-digit growth to their retirement nest egg. For instance, a 60-year-old retired with ₹5 crore retirement fund in January 2008 (just before the onset of the subprime crisis), having a 50:50 allocation in equity and debt. He expects a 4% (Rs. 20 Lacs per annum) inflation-adjusted withdrawal per annum from the portfolio. Unfortunately, this scenario looks like he has made a blunder of his lifetime. 

The following chart displays the performance of his retirement fund since January 2008:

The above chart clearly shows that from 2008 to 2009, the retirement nest egg fell to 3.78 crores because of a withdrawal of 20 lakhs plus a negative 20% return. But the fund experienced a recovery in the following years. During those 14 years, Sensex delivered an average return of around 9%, while debt markets have given a consistent 6% return. The withdrawal of Rs. 20 lakh per year has increased every year to adjust for inflation. Therefore, despite high inflation during 2010-2015, the retirement fund has grown to about 6.76 crores.

This is a highly conservative assumption as we have fended off the role of a financial advisor in improving the portfolio performance.

Dynamic portfolio management by a skillful financial advisor enhances the portfolio return. They achieve this in two ways. First, by diversification of the portfolio to higher return generating assets like Tech, Mid Cap, Small Cap, Mid Cap etc. Second, by doing calculated risk management for profit booking when the market is overvalued and buying equity in an undervalued market. 

Moral of the story: As long as you don’t panic and sell your equity portfolio during a financial crisis, you and your portfolio will be doing well in future.

If we end up in recession coupled with high inflation, as many economists anticipate, retirees can follow these tips to preserve their retirement nest egg:

1) Follow Asset Allocation Approach:

The latest research suggests that the retirement portfolio delivers maximum returns in the long term hinging on asset allocation with a retirement tenure of around 25-30 years.

So, retirees must stick to their respective asset allocations and rebalance their portfolios whenever volatility disturbs the debt-to-equity ratio.

During a crisis, equity allocation will get reduced compared to the policy formed. Therefore, equity buying must be done as per the policy. This way, we can buy equity at a lower price.

2) Don’t Get Anxious and Lose Your Patience:

In investing, an investor has to deal more with his emotions than his money. The portfolio depletion owing to fund withdrawals and market correction might make a retiree investor restless.

Under these mental pressures, investors are prone to make wrong and impulsive decisions like trimming their equity portfolio. This is an investor’s most common yet biggest mistake amid a crisis.

An investor must know that the equity markets eventually recover. The only thing a retiree investor must do is to be patient and stay put with their equity portfolio. Then, if surplus cash is available, they can also increase their equity holdings in the portfolio at a right time.

3) Withdraw Funds from the Debt portfolio:

For a portfolio to withstand a recession, liquidity planning should be done for the debt portion of the portfolio.

The fund withdrawals for monthly expenses and contingencies should be made from the debt portfolio, leaving alone the equity assets. It gives the equity portfolio the required energy to fully recover along with the market.

We wish you a happy retirement!

Best Regards
 

Mr. Akhil Bhardwaj

Partner

Alpha Capital