Venugopal was planning for his retirement and wanted to ensure the stock market volatility towards his retirement age does not affect his retirement plans, as most of his assets were financial instruments.

Venugopal, aged 53, along with his wife Lalitha, aged 51, has been accumulating wealth over the years. He was highly disciplined and systematic in his approach. He is managing a small business which he can continue as long as he is physically active. He is managing to make around ₹35 lakh per annum post all the expenses. He reserves ₹15 lakh per annum towards his personal and family expenses. He will be able to invest ₹20 lakh towards his retirement and wealth accumulation till he attains 65 years of age. He wanted to check if the accumulated corpus is enough to retire immediately. He is planning for retirement with an estimated monthly expense of ₹1.25 lakh at current cost.

He is keen to reduce the equity exposure, which is 63 per cent of his investments, nearing his retirement but not clear how and when to move to fixed income.

Key observations

1. Retirement is a key goal for everyone, as people look for a dignified retirement life without depending on anyone for their financial needs. With limited resources, retirement goal needs to be approached with multiple unknowns for the long term, which may be more than the working life span of the individual. Venugopal wanted to understand how to manage his finances for the long term with dynamic changes in interest rate, inflation and his needs after retirement.

2. Venugopal and family were leading a comfortable upper middle-class lifestyle. Their needs are more focused on having the same comfortable lifestyle after retirement. They have their social circle in multiple cities in India and are inclined to travel across India for social events and for vacations.

3. Though both of them are healthy now, they like to explore options to stay in a retirement community after retirement in case of any health challenges. This may require additional corpus, for which they like to fund adequately.

4. Their current house may need to be renovated at the time of retirement. They may prefer to stay in the same locality, but do not want to invest in a new property that is not affordable for them right now.

Review, recommendations

1. The current value of their financial assets is sufficient to retire now, if they account only for their retirement monthly spendings. As per the discussion, they need additional corpus towards their travel, social and health needs. Hence, he may have to continue his business till he accumulates sufficient corpus.

2. With the rising medical costs, it may be difficult to arrive at a corpus needed for health reasons. Health insurance policies with higher sum insured is an option to consider. As they want to explore the idea of living in a retirement community with medical facilities, the cost should include this option as well.

3. With the current value of their financial assets and expected annual contribution of ₹20 lakh till his age of 65, they have the potential to build wealth of ₹20 crore, if he continues his business for the next 12 years at a reasonable return expectation of 11 per cent CAGR post-taxes. He may need to tweak his equity allocation dynamically.

4. Out of the total corpus of ₹20 crore, they need ₹7.9 crore towards their monthly requirement of ₹1.25 lakh at current cost, if they consider 6 per cent inflation and post-retirement return expectation of 8 per cent after adjusting for taxes.

5. With a little bit of background checking, it was agreed that the additional corpus needed to settle in a comfortable retirement community suitable for their lifestyle and requirements may cost them ₹2 crore at current cost additionally. With an inflation of 10 per cent, they need to set aside ₹6.3 crore at the time of retirement for this need. If they plan to move to a retirement community, they have the option to sell their house which can partially fund this corpus.

6. The rest of the corpus may be divided judicially to fund other social needs for them.

7. As they are keen to understand how to manage their finances nearing retirement, it has to be dynamically managed with regular annual reviews and portfolio rebalancing to suit their risk profile. Though Venugopal understands the market dynamics, it was a concern for both of them to move to safety systematically.

8. A safe landing towards retirement is key to peaceful retirement. It was advised to maintain 60:40 in equity: debt till his age of 55 and beyond that, once every three years, they may reduce the equity exposure by 3-4 per cent till his retirement. This will bring down the equity exposure to 50 per cent at his retirement age. They need to review their risk appetite in the changing environment nearing retirement and finetune the asset allocation accordingly.

Comfortable retirement living is one which begins with the right asset allocation depending on the family’s income needs and longevity.

The author is a SEBI-registered Individual Investment Adviser and can be reached at www.financialplanners.co.in

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