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Market Crash, Just Before Retirement can prove disastrous to your retirement money, especially for those who have equity focused investment portfolio. This is a not so considered risk scenario in the market, however, it cannot be ignored.

Not only a market crash before retirement but also after your retirement, a market crash further can reduce your portfolio value at a time when you are already taking out a sum of money from your corpus. If such a situation occurs, then you fall at the risk of running out of money before you run out of time!

Here, the prominent question is ‘what’s the basic problem?’ and the answer to this question is, equity-focused portfolio even when you are much near to retire!

Let us understand the whole risk scenario and know about the prominent strategy to prevent such a situation.

Market Crash Can Erode Retirement Money…………..

Let’s suppose you are 58 years in, two years away from retirement, and you have a retirement kitty worth Rs 2.5 crore build up in mutual funds. The ratio that your investment portfolio follows, 70 percent equity and 30 percent debt. That means you have Rs 1.75 crore in equities and Rs 0.75 crore in debt.

Suddenly before two years of your retirement market faces a crash and your equity portfolio faces a (-) 40 percent market crash. In such a situation, your equity portfolio would dip to just Rs 1.05 crore. The total corpus also falls to Rs 1.8 crore from a peak of Rs 2.5 crore.

Ultimately you can see that if a similar situation occurs, then in a single year your portfolio value will go down by 28 percent. And to manage this loss you might go on reducing your expenses after you retire, that might not be possible.

Market value changes daily and volatility or sudden market crash is normal

That simply means you need to make some changes in your investment strategy when you are near attaining your retirement.

Then what’s the way out to this problem?

Well, the above-assumed scenario clearly says that an equity-focused strategy for retirement planning only works better when you are still years away from your retirement. But as you start approaching your retirement, you simply need to bring some changes to your investment strategy.

You simply need to make sure that your retirement portfolio is not exposed to a high amount of risk when you are 2-3 years away from your retirement.

Now the question hits here, should a retiree consider equity in his portfolio to continue the growth of his investment along with the redemption of a fixed amount regularly?

It is very simple to understand that without equities n retirement, you will need a larger corpus to take care of inflation for decades. If you have enough savings you can tackle the situation but if you don’t have then you need the growth of equity in your portfolio.

What Strategies Can You Follow To Deal With The Sequence Of Risk?

Well, below I have listed some strategies that you must follow to save your retirement money from a market crash just before retirement. These strategies will help you deal with the sequence of risks.

• As you approach retirement, gradually reduce equity in the portfolio. So, while you may have a 70:30 investment in equity’s favor till 52-55, you should consider reducing it to something like 15-30 percent by the time you cross 60.
• Always have a bucket where money is parked in simple debt instruments say liquid funds that will take care of your expenses for at least 7-10 years. This is necessary because having a buffer of 7-10 years gives your equity portfolio enough time to recover.
• Be flexible and spend less if need be. It’s difficult but can be achieved. Let’s say you had planned retirement for Rs 9 lakh per year lifestyle. So, you should be willing and able to live on less if the portfolio is facing bad days temporarily.

Let Us Sum Up…..!

The build-up of retirement wealth and protecting your retirement wealth from a market crash, are equally important and the latter part can only be achieved if you de-risk your portfolio once you start approaching your retirement.

So, if you are getting close to your retirement and have a lot of equity, then talk to your advisor about this less-discussed but extremely crucial risk.

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For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).