Personal Finance

Managing your nest egg amid market volatility

Sridevi Ganesh | Updated on May 13, 2020

Hand putting Coins in glass jar with retro alarm clock for time to money saving for retirement concept   -  Getty Images/iStockphoto

For efficient management of a retirement corpus, one should focus more on certainty of income than on generating superior returns

Chitra would be retiring in two years from now. She was worried about the ongoing market volatility and anxious about her retirement. She is 58 and would not be in a position to continue working beyond the age of 60.

Many of us do not realise that the decision to retire is more emotional than we think. Doing the math and getting well positioned to retire is just the logical part of the decision. If you do not have a Government-assured pension, it can get quite complicated. ‘Personal Finance’ should be read with more emphasis on the word Personal than the word Finance.

During the yearly review of her financial plan, Chitra used to talk about spending for her family. She is a single earning member of her family and her husband was incapacitated years back. With a good career, Chitra did well at her work and saved well too. She owns a house and remains debt-free.

Her assets are as follows:

Self-occupied house - ₹1,00,00,000

PF - ₹70,00,000

Mutual funds (before market fall) - ₹85,00,000

PPF - ₹35,00,000

Fixed deposits - ₹25,00,000

Chitra was regularly investing in mutual funds only through the SIP route. We advised to rebalance her portfolio in 2017. She exited mid-cap schemes and the money was parked in liquid funds. She continued her mutual fund investments mostly in large-cap schemes and liquid funds as well. Her investments in liquid funds in 2017 were to the tune of ₹15,00,000 mapped towards her retirement. Her overall asset allocation ratio was at 32:68 in equity and debt before the market fall in March 2020.

Financial planning is all about beginning with the end in mind. Retirement is a key goal for everyone. Tracking the retirement portfolio regularly, dynamically fine tuning the asset allocation as the individual moves towards retirement, and setting reasonable return expectations based on market environment are crucial to creating a sound foundation for retirement. In fact, bringing down the return expectations, especially in times like these, is challenging but should be done.

In Chitra’s case, she was very reluctant to move out of mid-cap funds in the year 2017 as those were her highest return-yielding investments at that point in time. But we recommended that she do this to protect the gains made until then, explaining to her that this was not being done due to the prediction of a market fall but to prevent erosion of returns if the market fell.

During her portfolio review in the month of April, Chitra was upset that her investments in long-term mutual fund SIPs were turning negative when she was inching closer to her retirement. We explained her that her investments had come down to ₹75,00,000 from ₹85,00,000 out of which she had ₹16,00,000 in liquid funds. By the time she retires after two years, she would get her PF maturity. Along with her PF, PPF, liquid funds and fixed deposits portfolio, she could manage her expenses for the next 15 years. By then, her mutual funds portfolio would have fared better. Systematically exiting her investments from equity and moving to debt over the next 10 years would help her live her retirement life comfortably.

Retirement is just the end point of an active working life but it should be remembered that it is a new beginning. The retirement corpus has to be managed efficiently. Efficient management does not mean generating superior returns. Depending on the individual, the approach should be to move towards certainty. Reducing unexpected downward movement on the yearly income should be uppermost on the agenda, especially for short to medium term horizons. We advised Chitra to move her corpus to Senior Citizen Saving Scheme and other annuity options after her retirement, to ensure safety and certainty of income without encountering too much volatility.

Exiting investments should also be planned with market volatility in mind. It is more important to focus on the goals rather than getting the highest possible returns. When the goal is not far away, actions oriented towards stepping up returns should be avoided, if it involves high risk.

Chitra had spent a lot of money on travel and gifts to near and dear ones over the years. It was time for her to reduce her expenses in those areas. She wanted to have a post-retirement income of ₹35,000 per month till her life expectancy (90 years), adjusted for inflation. As there were many assumptions involved such as inflation, fixed income returns, and equity returns, we also advised her to keep a reserve fund towards retirement heath fund, travel needs and other requirements.

Chitra would need ₹1.14 crore to get ₹35,000 per month at current cost. Inflation is assumed to be at 5 per cent per annum whereas investment return is assumed to be at 6.5 per cent per annum post tax. This is based on capital drawdown approach, and she was advised to keep the balance money in different baskets towards emergency needs, health needs, and travel needs in different products suitable for her investment time horizon. We also advised Chitra to increase her health cover to ₹10,00,000 as base policy and ₹10,00,000 as top-up cover post retirement.

The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants

Published on May 13, 2020

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