How my portfolio has evolved one year after I retired

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I have already shared my financial freedom journey through this article: My journey: From Rs. 30 bank balance to financial independence. I decided to stop working in mid-2023, and I thought I should share my experience and plan for a safe and comfortable retirement. Probably a sort of follow-up to Pattu’s article on retirement income, Elements of a robust retirement portfolio.

Also by Anand Vaidya:

The objective of sharing this article is the hope that it will be of some use to those nearing retirement or provides a different way of doing thing than what is popular.

I benefit too, since my thoughts are clarified while writing in text form, rather than just seeing the numbers in a worksheet. I hope the comments, both positive and negative will be useful to me.

Here’s my current status:

• Since I managed my own business, the word “retirement” is probably not appropriate, just that I stopped accepting new business contracts.
• No lumpsum, pensions, gratuity received as part of “retirement” (self-employed, duh!)
• Retirement fully self-funded from accumulated retirement corpus.
• Income is needed only for me and my spouse, possibly for the next 35 years. Only son is working and independent.
• I have many interests, but I am not planning to earn anything from them.
• No loans or financial commitments such as children’s education, marriage etc
• Fully paid, self-occupied homes, other real estate, gold in the form of jewellery and miscellaneous assets are not included in this article. Only financial investments are considered.

Here’s my Retirement Income Plan:

Protection:

• No term insurance since we don’t need it
• Health insurance of Rs 11 lakhs through my son’s employer.
• I maintain a corpus dedicated for medical expenses. So I should be able to mobilise around Rs 15L/year for medical expenses without sweating. (I hope never to spend a dime on medical expenses, though!)
• I reserve about 1.5X in liquid funds for urgent medical or other needs. (to be topped up from equity gains, when there are outsized gains)

I feel that health insurance claims are an hassle and paying from pocket is simpler. I’d rather put the premium in my dedicated medical fund yearly and let the corpus grow. My focus and expenses have been geared towards preventive health care rather than post-disease treatment. And it seems to be working well so far.

My go-to method has been Regular testing, acting on test results, regular doctor visits and supplementation (B12 and D3), cleaning up food habits, regular exercise and a good sleep routine (can improve there). So far, it has worked out beautifully with our annual medical expenses for three < 20K – that too spent mainly on preventive lab tests and eyeglasses.

Also, I plan to take a floater super top-up of 50L to 1Cr soon. This one has been pending for quite some time. 

Expenses: After my son completed his education and started working in another city, some of our expenses have reduced (college fees, petrol, books, clothes, travel costs, extra courses, digital gadgets etc)

I noticed that the grocery expenses which should have gone down by 33% has either stayed the same or slightly increased. Food inflation, maybe? More premium products? Probably.

The biggest expense that rose post-retirement was travel, due to the ample availability of another expensive resource: time. More money is spent now on travel, books, gardening tools, seeds and saplings.

I keep two numbers for expected expenses. 

1. Normal Expenses: Spend freely without any restrictions. This will be referred to as “X” in this article, and all my planning is based on this number.
2. Crisis Mode Expenses: These could be activated when a crisis such as COVID-19 or 2008 hits, and we need to curtail expenses and take all the losses that the equities will deliver. 

My estimate for this number is about 65% of Normal Expenses. Quality of life expenses are retained, but we will either reduce or eliminate the following expenses (temporarily):

• Travel.
• Capital Gains Tax. (No MF redemptions.)
• Gifts and charitable donations.

Inflation and Returns Expectations:

Average inflation ~ 6-7%, with some categories at much higher rates. (Medical, replacement of large equipment such as treadmills, fridges, Solar system parts, in-person services, travel etc)

Returns expected from Debt at 5-7% (Currently at 8.9% with Debt MF)

Returns expected from Equity: 10-12% but all calculations done with 8-9% only (Currently at 23%  2020-2024)

Planning Retirement Corpus:

The goal is to invest sufficiently for both current income and future growth, maybe even leave behind a good amount to the inheritor.

I realised that rules like 30:70 or 40:60 (Equity:Debt) are not very useful. The dilemma I faced is, if I pick a random E:D pair: 

– I could underperform (too little equity where I have the capacity to take on more risks) or

– I might be taking on too much risk (equity) and could be hit during a market crash

I experimented with various E:D ratios and bucket strategies in Excel but settled on my own plan, which I am comfortable with. 

I chose a very simple three bucket strategy as follows, instead of the more extensive bucket strategy suggested by Pattu: How to create retirement buckets for inflation-protected income.

I have allocated my pile of money as follows:

Note: 

Debt: Investment that generates income includes FD, NCD, Gov/RBI Bonds and also Conservative Hybrid funds but excluding Emergency and Opportunity funds

Equity: I fix my requirement for Debt and invest whatever is leftover in Equity, as seen in the table above. Equity investment primarily for growth and topping up of Income & Emergency buckets, 

Equity funds include index funds (Midcap, smart beta), BAF, Aggressive Hybrid and Flexicaps. I count all hybrids that suffer equity taxation as pure equity funds. My Equity PF is dominated by Largecap and zero smallcaps.

Some Ratios: 45% Equity, 55% Debt . My comfort level is between 40%-50% equity. Probably will move towards 50% Equity in the next few years. (Is that number affected by the current bull-run euphoria??)

• Ratio of Largecap to Midcap: 70% : 30%
• Ratio of Financial: Physical assets: 60% : 40%

So you can see that my Equity portfolio is quite conservative, though one would think the allocation to Equity is a bit too high (at 45%), however, hybrid MF schemes have lower equity holdings and my BAF investments are 50% less volatile than pure equity funds. 

Reducing Tax Outflow: 

Since the corpus is shared between me and my wife, potentially, we can derive tax-free income as follows:

• Debt: 7Lakh+7Lakh at slab rate
• Equity: 2×1.25Lakh (the exemption offered by ITDept for equity) ie at least Rs16.5L is available tax-free thus earning the full coupon rate.
• Tax-free bonds, adds to this tax-free base income

Some necessary redemptions from liquid Debt MF get added to the slab-rate taxation.

I pay tax without grumbling on whatever income exceeds the tax-free limits, while trying to minimise unnecessary redemptions.

PPF interest, miscellaneous insurance policy bonus (accrual only) add to this income but are not considered in any calculation.

Substantial portion of debt component invested in Gilt and Conservative Hybrid are anyway taxable only upon redemptions and hence tax hit only when redemption is needed. 

The excess leftover from fixed income interest/coupon received is directed at further equity investments, and occassionally debt. I don’t have strict rules on rebalancing or Equity:Debt ratio for this. Probably E:D 50:50 is what I am comfortable with.

Further Comments: What helped the corpus’ accelerated growth is definitely the post-covid bull run. And I did make up for the lost time (not much invested until 2015) by aggressively investing during 2020-2023. I have slowed down only in CY2024. I ran out of money 🙁