I have known many men who have died in their 90s. This has meant that they lived off a) their portfolio b) their pension or c) with their children.

The average age that I see that a person lives in retirement is about 25 years. Retired at 60 died at 85 or retired at 65 and died at 90. I have also seen people go on till 105 – and I know he had no portfolio and no pension.

What am I trying to tell you? there are some risks in our retirement funding. So if you are spending Rs. 5L a year at your age of 60 years, you will need at least Rs. 1.5 crores (apart from your house) – assuming that your investing pattern does not change. Apart from this what all do you need to know…

1. The most important risk is LONGEVITY RISK: we have no clue about how long we will live, and longevity has gone up. From 28 years in 1947 to 72 in 2019. And see within your own family – if your uncles, aunts, cousins are living up to 93, and you are 29, you need to be prepared for 103, not just 93! The length of your retirement is quite uncertain and, since your household is an average one, could actually range from less than a year to 40 or more. Life expectancy just indicates an average for many people who are a lot like you and there is no reason to believe yours will be average!
2. SEQUENCE OF RETURN risk: If you started at the bottom of the market (and invested a big chunk) chances are that you will leave a decent amount of money for your next of kin. However if you retire at the top of the market, you can do serious damage to your limited capital. In fact it might force you to remove at the bottom of the cycle – fear can play havoc on a retired mind – remember that. SRR is even more difficult to predict than the average age to which you will live. Even worse your mind will keep saying that it was your foolishness – remember in the market things look so ‘obvious’ after it has happened! Sadly there is not enough research in India and not enough people trying to live ONLY off their portfolio. I do think that SRR is at least twice as imp as the Average return that you get from your portfolio.
3. ABILITY TO HANDLE COMPLEXITY: As you age, your ability to handle a complex portfolio goes away. It just disappears. So you will need a simple portfolio – bank fixed deposits, annuities – both give poor returns and are taxed at full rates.
4. Money spent during retirement: In the US they have the 4% rule – In India let’s assume we have the 6% rule. There are senior bankers who feel that they can put money in a balanced fund and draw 1% per month (which makes it the 12% rule!!). When you argue they say “ok will 9% work in a balanced fund”. Try explaining why the math will not work does not matter! Anyway far more important is a) how much do you spend per month and b) how much you plan to spend in the future. Real numbers, not some assumption. For many people this number is a big, big challenge. Clearly LDI (liability driven investing) or MPT (Modern Portfolio Theory) both have their limitations – both need reasonably accurate expense estimation. That is like magic. Nobody can do a real magic. When actual spending exceeds the spending rule estimates, the couple is exposed to greater risk of under-funding retirement than the spending rule previously suggested. When estimated spending rates exceed actual needs, the household becomes more likely to under-spend. In India people dramatically under spend – and I see people suffering.
5. The value of the portfolio at various points in time: When a person is experiencing a nice jump up in the portfolio, the willingness to spend more happens. The future value of the portfolio is also impossible to predict.

Now look at my problem. People come and ask me “I have Rs. 3 crores…is it enough”.

Now take these 5 uncertain factors. Assign a probability, and then multiply them. That resultant number is the probability of my answer being accurate.