How to plan for longevity risk in retirement

[SpacemanSpiff]

@neha1101

Gods luck was with me that I did not need the money from my equity at that time.

Equity investments should be planned such that you don’t ‘need’ to exit them for next 5-10 years. Asset allocation is imp, even more so if there is no income stream. So debt/FD/other must be able to cover these expenses + emergency expenses. In normal times, you can still take from equity if needed as per allocation target and meet your expenses.

Even after all of this, fear of multi decade bear markets will always be there. But hopefully wont happen for growing country like India for next few decades atleast. But also must be able to beat inflation and use only real returns for expenses. Only thing to do against this is maybe have some sort of external income going. Trading can help i hope, but its not for most people.

@neha1101

Just dont feel like putting money in private company as these are life long and not sure what happens if they go bankrupt.

Yeah i feel same, also better look at fine print and also make sure that these plans will cover inflation. lakhpati used to mean something, now its nothing. crorepati will get there too.

[Gnome]

@SpacemanSpiff

Asset allocation is imp, even more so if there is no income stream.

I learnt this the hard way.

@neha1101

Somehow I only trust Government Organisation when it comes to Life Insurance (LIC my fav) and similary for annuity. Just dont feel like putting money in private company as these are life long and not sure what happens if they go bankrupt.

Nothing beats stress free life. I am with you on this one.

[Suyash.K]

@neha1101

Just dont feel like putting money in private company as these are life long and not sure what happens if they go bankrupt.

What if we reverse the scenario? For example, we take a loan from a private and the company goes bankrupt. Do we still have to repay the loan?

[jashjacob]

@Suyash.K

Do we still have to repay the loan?

I’m sure! Retailers don’t get to escape debt

That’s for Adani’s and Ambani’s.

[Gnome]

@Suyash.K

What if we reverse the scenario? For example, we take a loan from a private and the company goes bankrupt. Do we still have to repay the loan?

okay i like this thinking out of the box kind. You are smart.

@jashjacob

I’m sure! Retailers don’t get to escape debt

That’s for Adani’s and Ambani’s.

we need to take enough debt to go to london and settle.

[neha1101]

@SpacemanSpiff

Equity investments should be planned such that you don’t ‘need’ to exit them for next 5-10 years.

I fully agree with you, but when do we ever exit? Most of the experts and people who write about finance say, invest only if you are the in long run. Now I am ok with that, but if I had invested in 2010 and the long run ended in March 2020. I will be crushed.

So the million dollar question which I am still asking and have not found the answer, when do I take the profits.

My own stategy is to keep a target price for each stock, once it reach, start selling in parts and bring down the average cost and thereafter leave it for perpetuity. At the same time if it falls accumulate. Overal result should be take out the capital invested and leave the rest.

[Abhilash_Patil]

@neha1101

So the million dollar question which I am still asking and have not found the answer, when do I take the profits.

This is how I book full/partial profits in any stocks.But I hardly sell, if company is profitable.I will accummlate more during crash.

I guess Discount Cash Flow can solve this, in my case if intrinsic value of any share is greathe than 3x of current market price(cmp), it means stock is overpriced and partial profits can be booked.

Most imp, when to enter on basis of DCF Calculation:

When cmp is less than intrinsic value for any share, it’s value buy.

How to calculate DCF manually as well as using python code:
https://divyankm.github.io/Stock-Exchange-Data-Analysis/frontend_html_files/dcf_reverse_dcf.html

DCF can be calculated on 3000+ stocks automatically using python code, stated in above link.

[SpacemanSpiff]

@neha1101

So the million dollar question which I am still asking and have not found the answer, when do I take the profits.

For index/MF investing only -

1. Sell as per need, as per target allocation etc in normal markets. Allocation matters, if market is moving up, move some to debt etc. 10y gilt i think works well with Index, although 10Y gilt may not be the best for expenses due to duration risk.

2. During income years, we don’t really need to sell ( but ideally still maintain debt allocation for tough times - may not have a job). As retirement nears, we have to face this risk. So manage risk accordingly ( say 5-10y earlier). But must still have equity investments to get something above inflation.

3. Don’t sell if we are in bear phase, and if able add some without going overboard ( esp if need money for expenses). Can have adding on crashes as part of allocation plan. This is the reason for 5-10 year window obv.

Stocks are different. You need an edge and exit will be part of your rules.

[RajendraPatil]

The problem is I will retire at 55-60 and need t remain cashflow which matches inflation till I am 100-105 years.

Which effectively means if I got job at 25… I have 30-35 years to accumulate money which will help me survive for next 45-50 years.

@SpacemanSpiff

Equity investments should be planned such that you don’t ‘need’ to exit them for next 5-10 years

That means I need money for 50 years. If I exit equity at 45-50 then next 50 years debt should give me returns which increases with inflation.

This is slightly improbable if not impossible. I mean if my monthly outgo at the age of 60 is 1 L INR, with 6% inflation, keeping all other things constant I will need 10L INR at the age of 100.

This is 10 times more than what I started retirement life. With out accounting lifestyle inflation.

@arvind1k

I would like to highlight one important financial- product, which, somehow, gets battered by the people who love and believe in stock market:-“ANNUITY PLANS” .

Also with annuity plans current structure, its difficult to meet these numbers.

@t7support

Why try to time the market and cap your profits by hedging which by the way will also make things more of a hassle in portfolio management ?

To reduce sequence of returns risk which @neha1101 mentioned

@neha1101

what happens if this got extended to many years?

This is real risk. Whatever said and done No one can predict future…at least for short term .

The ability to take risk or window does not exist when I am retired. Unless I have cashflow which beats inflation, I need to dip in principle amount or use plan B similar to

@neha1101

doing a Reverse Mortgage if I own a self residing property. This will give me adequate cushion to stop SWP when market falls as badly as it did.

To beat inflation, we need equity like return,
To beat multiyear recession, we need drawdown similar to fixed income.
Since Decision making can be issue at old age, need portfolio management which requires zero prediction about future.

@neha1101

So the million dollar question which I am still asking and have not found the answer, when do I take the profits.

Personally, I am looking for fund similar to 7twelve. Which will effectively implements buy low and sell high across asset classes in balance way irrespective of economic situation.

When investor withdraws from it, money gets withdrawal in equal proportion of rise from last withdrawal… ensuring least possible withdrawal from every asset class.

Unfortunately there is none in India (to my knowledge), So implemented my own version of it.

[SpacemanSpiff]

@RajendraPatil

That means I need money for 50 years. If I exit equity at 45-50 then next 50 years debt should give me returns which increases with inflation.

This is slightly improbable if not impossible. I mean if my monthly outgo at the age of 60 is 1 L INR, with 6% inflation, keeping all other things constant I will need 10L INR at the age of 100.

This is 10 times more than what I started retirement life. With out accounting lifestyle inflation.

@SpacemanSpiff

But must still have equity investments to get something above inflation.

Please read again, i did not say exit equity. Your expenses for next 5-10 years should be in debt or similar. Or atleast some how you have to be able to manage without forcefully selling equity in bad times. That’s all.
Otherwise, sooner or later bad env will occur and then you will have to sell equity at bad times, Ideally we should be able to buy on crashes. I think you need to have equity or equivalent class of returns even in retirement, some way to have decent income over inflation.

Along with above, i think either we should have a large enough surplus beyond need or should have some sort of earnings after retirement as long as possible to reduce risk. Or support from family.

[t7support]

@RajendraPatil

To reduce sequence of returns risk which @neha1101 mentioned

When something is virtually guaranteed to trend upwards hedging and the complexity it brings is an overkill. Besides there is a real risk of capping the profit. E.g :- Hedge nifty at 18k and nifty zooms to 21k, the feeling is certainly not going to be elation.

[neha1101]

@RajendraPatil

So implemented my own version of it.

If possible, only if it not intrusive, could you at a broad level let us know your version.

[jashjacob]

@neha1101

Plan B

Don’t use plan B. Invest in your kids like most Indian parents.

[Gnome]

Probability wise looking at her conversation history she will be angry/upset for this statement.

[RajendraPatil]

@SpacemanSpiff

Please read again, i did not say exit equity. Your expenses for next 5-10 years should be in debt or similar. Or atleast some how you have to be able to manage without forcefully selling equity in bad times. That’s all.

Agree. Understand your viewpoint

@SpacemanSpiff

Along with above, i think either we should have a large enough surplus beyond need or should have some sort of earnings after retirement as long as possible to reduce risk. Or support from family

That’s exactly original query … what can be plan B or C ?

@neha1101

Any suggestion for Plan B or C

I also do not have an answer for it. so Trying to find out what I can do, in order to ensure plan A does not fail.

@t7support

When something is virtually guaranteed to trend upwards, hedging and the complexity it brings is an overkill.

Agree with the second part that complexity can be overkill and like most other things in life like simple strategy wins most of the time.

However, when I am at retirement, the first part needs to be relooked.

This is a graph from psychology of money which tells how “inflation adjusted” US stock market behaved in different time periods.

Experts may disagree but there is no assurance that it may not happen in India for an extended period of time. or how Japan stock market moved… There can be black swan effect.

What I am simply saying is that once I am retired the risk tolerance goes down .and that’s what the original question is.

@t7support

Besides there is a real risk of capping the profit. E.g :- Hedge nifty at 18k and nifty zooms to 21k, the feeling is certainly not going to be elation.

Agree. Multi Asset portfolio and periodic rebalancing is not designed to beat the best performing asset in that year. It will never be.

It just ensures that drawdown is capped. and again it works best if complexity in decision making about asset allocation is removed.

It is supposed to reduce fluctuation

@neha1101

If possible, only if it not intrusive, could you at a broad level let us know your version.

Ok… I do not have any patented secret! however now I think the thread should be moved to “personal finance” from “Versity”

Although its not rocket science, trying to give a bit of a detailed explanation so that I can get feedback on where I can improve…

it might test your attention span though !

fundamentally I wanted to build retirement portfolio or part of it using asset classes which are uncorrelated (as far as possible) to minimize drawdowns and maximize returns

This table indicates (one way) to achieve a point of minimum variance.
Effectively start with an equal proportion of all four components

• Nifty
• US NASDAQ
• Gold
• Liquid

and re-balance every year once. (while withdrawing money from kitty)

However, I do believe in India’s growth story , and wanted to ensure NIFTY has more weightage to be on efficient frontier. Its possible to allocate more % to nifty but it (slightly) complicates rebalancing.

So my current retirement portfolio looks like equal weight of

• Nifty index
• Nifty Next 50 index
• 200 Momentum 30 index
• Low volatility index
• Gold index
• US Total market index
• Medium duration debt fund
• Liquid fund

And aim is to rebalance every year to have exactly the same amount in every class. Esp while withdrawing.

Selected momentum and volatility index as intuitively (haven’t calculated) they seem to have low co-relation with each other. no particular resoan to select Next 50. I could have selected two different nifty index to ensure equal distribution.

Is it the only way?
There are may ways to skin the cat, e.g. Probably alpha index would have been better fit than momentum index.

Does it work?
When we are withdrawing… less drawdowns seems to help in preserving capital.

The 7/12 study shows asset diversification “and” rebalancing helps in preserving capital .

100 % Nasdaq equity only portfolio gave 9.52 % returns during study period and 7/12 diversified portfolio gave 7.76% returns
However, something strange happens when you are withdrawing every year from kitty.
After 20 Years of Withdrawals balance Value is less for equity only portfolio than diversified portfolio.

What is magic here?
Its because lower drawdown combined with sell high strategy helps lower erosion of capital (with respect to single asset portfolio.)

Even after inflation adjusted 4% (any fixed number) withdrawal every year , my capital is increasing irrespective of economic cycle/phase. This will ensure that I don’t have to make decisions when I am in my 80s or 90s… Its like buying annuity plans but far greater returns.

I think this what my expectation from retirement fund,

Questions/Feedback/comments/suggestions welcome !

[SpacemanSpiff]

@RajendraPatil

That’s exactly original query … what can be plan B or C ?

Portfolio allocation + re balancing i think is the best one can do passively. There is no magic solution. Going further, You can try to test it out and see what works well. Long term gilt may have a place in portfolio too as they can sometimes have inverse correlation with equity. And probably don’t use them when rates are absurdly low.

After that either you need to be active, which is risky as most fail. Or perhaps use your skills from life so far and have some low effort way of making money that is also interesting to you and that can take care of managing expenses until you cant/don’t want to work. Also we can try to save more. If you need say 1 cr to retire but save 2 or 3 or x cr, it will be much easier.

For me answer is trading. For now its plan a b and c. Diversification is only within trading. Retirement for me probably will mean stopping intraday completely and shifting to low frequency low effort trading along with some diversification to other assets like you said.

[raoawesome]

@neha1101

but something like what happened in March 2020.

That’s why you should have gold, not debt fund/FD. Bonds are rich peoples asset. The rich has 28% of portfolio as bonds. Majority of these HNI’S , VHNI’S have gsec bonds. See when things go to hell they know central bank goes to secondary market and starts buying those 10 year yeilds which increases bond price. So the rich can one earn interest income and secondly can easily exit when QE is in motion. Now you are probably wondering , why we can’t do? Well the standard lot in CCIL bond market is 5Cr, I certainly don’t think 28% of your holdings won’t come to minimum 5Cr.

I suggest to use gold as hedge. Always have minimum 10% of gold as portfolio. Goldbees ETF recommended!

FD’s are good cash flow, you can manage food expenses and to an extent clothes. As far others I can’t quantify whether it will pay for energy, because energy is the big elephant(petrol ,diesel, gas , electricity) .

Thirdly as finance with sharan says:-

Income generation comes from :-

1. 60% - 70%. From salary

2. 30% - 40%. From portfolio investments

So as soon as you retire I certainly don’t think any corpus can replace 1 with existing lifestyle expenses. Taking risk in equity makes no sense either. I guess sure you can sustain initial 5 years but certainly degrades over time. The key is being frugal here and really is needed because c’mon you are 60 just retired and can’t have desires like buying new car, costly Marriage for kids or cousins, helping xyz relatives, constructing new house , giving costly gifts!. Your goal is to sustain for rest of the life with the corpus you have.

Note :- only for salaried individuals that are only willing to work till retirement

@neha1101

Any suggestion for Plan B or C

Plan B:- sending your kids to aboard and living with 700$ per month sent by them.

Plan c:- start tea shop, taking chance in politics , food bussiness

Plan D:- make costly Marriage for kids screw your corpus retirement funds by being stupid and then die of heart attack or ailment!

Note:- these are what I see in my place or you can say what boomers are doing so far doing. Funny these ppl mostly choose plan B or plan D.

[t7support]

@RajendraPatil

It just ensures that drawdown is capped. and again it works best if complexity in decision making about asset allocation is removed.

It is supposed to reduce fluctuation

K got you

[RajendraPatil]

@SpacemanSpiff

Long term gilt may have a place in portfolio too as they can sometimes have inverse correlation with equity.

Thanks for the suggestion. I wasn’t very happy with my own selection of ““Medium duration debt fund” as asset. Would slowly change to long term gilt as asset.
Debt funds are always puzzle for me… but will do due research to zero down what I think can be treated as long term govt debt index.

@raoawesome

The key is being frugal here and really is needed because c’mon you are 60 just retired and can’t have desires like buying new car, costly Marriage for kids or cousins, helping xyz relatives, constructing new house , giving costly gifts!. Your goal is to sustain for rest of the life with the corpus you have.

These words should be inscribed in gold! Very important life advice.

Lifestyle inflation eats everything. If I am using car, I still need to change car after every 15 years. I will need driver even if I have self-driven for life. It’s important that mentally we accept to choose lower version of hatchback instead of premium sedan or SUV.

@raoawesome

Plan B:- sending your kids to aboard and living with 700$ per month sent by them.

secret wish of every Indian parent!
I remember in my village, every young man used to go Mumbai to earn money. Idea of earning money is to work in cotton mill in three shifts so that in dipawali they can buy new cloths every family member!!

[Bhuvan]

@neha1101

Are their any other options to fall back when market falls so badly. Not worried about corrections, but something like what happened in March 2020.

Any suggestion for Plan B or C

What you are talking about is called “sequence risk.” The scenario you mentioned will be a problem if you are 100% in equity, which isn’t a good idea when you are retired. It’s always better to gradually de-risk your portfolio as you age by decreasing equity exposure and increasing debt/fixed income exposure.

But this isn’t a solution to bad luck. Assuming that you aren’t sufficiently prepared for your retirement, the only solutions are:

1. Spending less
2. Working longer or generating some sort of side income
3. Monetizing assets through reverse mortages etc

But in general, if you are still working, it better to expect less and save more. Being over prepared never hurts.

Sequence Risk During Retirement