The Nifty 50 Index has lost about 20 per cent since last March. This means your portfolio has to gain about 25 per cent just to recover the unrealised losses. Then, it has to generate additional compounded annual returns to accumulate the desired wealth in your retirement portfolio. This may not be easy, given the recent market volatility. So, if you are 10 years or less from retirement, will you be able to retire as planned? In this article, we discuss how you should address shortfall in your retirement portfolio.

Bridging shortfall Retirement portfolio refers to the investment account you create to accumulate wealth that you require at retirement to sustain your post-retirement lifestyle. Our discussion here pertains to shortfall in retirement portfolios of individuals who are 55 or more and nearing retirement. If you are one such individual, you have to first determine if you have a shortfall in your retirement portfolio. Then, you should look at bridging the shortfall in your portfolio.

To determine the shortfall, we assume that you will have a conservative portfolio of 80 per cent bonds and 20 per cent equity at 55. Based on an expected post-tax return of 12 per cent on stocks and 5.6 per cent on bonds (8 per cent interest rate and 30 per cent tax rate), the return on the portfolio will be 6.88 per cent.

So, at 55, your portfolio should carry 70-71 per cent of the wealth you wish to have when you retire at 60. Why? If you need ₹10 crore at 60, you should have ₹7.1 crore at age 55; for, ₹7.1 crore, at a compounded annual return of 6.88 per cent, will grow to ₹10 crore in five years.

You will face a shortfall if, at 55, your portfolio is less than 70-71 per cent of the target wealth. The simplest way to bridge the gap is to increase your capital contribution. This is easier said than done. You may have to reduce discretionary expenses to increase your savings or seek other income sources.

Alternatively, you could increase your monthly savings to the extent possible and continue with your conservative 20:80 portfolio. This way, you can deal with the shortfall in your retirement portfolio only when you retire.

At that time, you should consider using your home equity through a reverse mortgage. This is a facility where the bank pays you a monthly sum for 20 years based on the value of your mortgage-free self-occupied house.

Or you can avail yourself of a reverse mortgage line of credit where you access bank funds within a certain period using your home equity, but only when required.

Rescheduling retirement? You do not have to postpone your retirement even if you face a gap in your portfolio. This is because you don't need the entire money on retirement. You can get the reverse mortgage line of credit when you want to supplement your passive income. Only after exhausting all options should you consider cutting your post-retirement lifestyle.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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