The Nifty started on a promising note in the month of April but eventually ended with a mild gain for the month. The Indian equity indices have been flat as a pancake for quite a while now. We are happy to report that things are beginning to stir on the economic front – growth seems to be coming back, though grudgingly. And with the whole world in a new normal, Dr Rajan’s comment about the one eyed King is not misplaced.
We want to devote the rest of this newsletter to a subject which we confront every day, as our investors quiz us about their retirement options. The big mountains to climb, financially, in one’s life are buying a house, children’s education and one’s own retirement. The first two are daunting enough – the third is becoming an ever more complex challenge with increasing longevity. Two decades back, people started work somewhere in their late 20s, hoped to work till 65 (a working life span of roughly 35 years) and were essentially planning to use their savings for a remaining life span of about 10 years. Today, people increasingly want to retire at 55 or thereabouts. And life spans are slowly touching the century mark and may yet go higher. So the average person today may work to 60, an earning life of 30 years and s/he has to use these savings for maybe 40 or more years.
That brings us to what we call our Systematic Withdrawal Plan – there are many among us who are planning for their retirement and have set some date in the future, when they would like to stop thinking about compensation as the raison de etre – wherein they would like to pursue other activities, that may not necessarily compensate them monetarily as their current jobs do – we are certain there are many artists, musicians, photographers, scientists, to just name a few, among us. It doesn’t really matter what the reason may be – there are many of us who would like to retire early. What stares us as an obstacle, to some degree, is our longevity which is only increasing, with technological progress.
We believe that equities are best suited for retirement planning – the obvious advantages are high long term returns and high liquidity. Observations over the last 35 years suggest that the Indian equity market can be expected to deliver about 14-15% per annum over long periods of time. If an investor could withdraw somewhere between 4 to 5% of their portfolio value every year, they could still hope to achieve a 9-10% growth in their portfolio, which would keep such an investor ahead of inflation.
This is of course for a pure equity portfolio – the higher the proportion of debt in the portfolio, the composite return of the portfolio would fall, and one would have to adjust withdrawal rates accordingly. We are conscious that our advice may be viewed as being biased – we eat our own cooking – so that absolves us from the guilt of over-selling.