The portfolio you create for retirement during your working life is significantly different from what you create at retirement to meet your post-retirement living.

The former is called retirement portfolio and the latter, retirement income portfolio. In this article, we discuss why the characteristics of these two portfolios differ.

During your working life, you invest in risky assets to accumulate wealth.

This phase of your investing life is called accumulation (and consolidation) phase. At retirement, your active income stops. You now have to depend on your investments (passive income) to support your post-retirement living.

This phase of your investing life is called decumulation (or the spending) phase. Your investment objectives are different in these two phases.

During the accumulation phase, your objective is to earn enough returns to achieve your target portfolio wealth at retirement.

Returns below the minimum acceptable return will result in failure to achieve the target portfolio value.

On the other hand, your primary requirement after retirement is to meet your expenses. Cash flow, therefore, is more important than returns in the decumulation phase.

Two other factors make your retirement portfolio different from your retirement income portfolio.

First is inflation. Rising price levels is a bigger issue if you are retired than if you are working. Why?

Inflation and savings

Suppose you require ₹5 crore in your retirement portfolio based on some inflation estimate.

Now, due to the actual inflation experience, suppose you revise the inflation estimate upwards such that you require ₹5.5 crore in your retirement portfolio.

You have to increase your savings to match the increasing price levels.

Though not easy, increasing savings is still possible as you are generating active income. But what if you face rising price levels as a retiree?

You do not have the luxury of increasing your savings, as you are dependent on passive income to support your post-retirement living.

The second factor is time horizon. If you are 28 and plan to retire at 60, the time horizon for your retirement portfolio is 32 years.

Your retirement income portfolio, on the other hand, is based on your life expectancy. Therefore, the actual time horizon of your retirement income portfolio is uncertain.

This factor is important because your retirement income portfolio has to finance all expenses from your retirement till you or your spouse live. You, therefore, have to invest in products that generate cash flows for life.

Growth vs income assets

The above arguments suggest that the products you use in your accumulation portfolio should be different from those you use in your decumulation portfolio.

Your accumulation portfolio should be biased towards growth assets such as equity while your decumulation portfolio should carry more income assets such as bank fixed deposits and, if necessary, lifetime annuities.

Therefore, you have to embrace volatility as a working executive but frown on it as a retiree!

If you are self-managing your money, be sure to transition from a retirement portfolio to a retirement income portfolio at retirement.

You can also shop for income assets during the last five years of your working life.

And if you are hiring an investment adviser to manage your finances, be sure to have your adviser draw up an investment policy statement for your retirement portfolio and then, at retirement, a withdrawal policy statement for your retirement income portfolio. Both these statements clearly lay down the objectives of each of the portfolio and the products that the adviser should recommend and manage in your portfolio.

The term “retirement portfolio” is often used with reference to both accumulation and decumulation phases of an individual’s investing life. But based on the arguments above, you can appreciate why that is not the case.

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

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