Risk and Returns in the Twilight Years

The conventional wisdom of equity not being suitable for retirees is not just misguided, but downright dangerous...

A few days back, I came across a retiree who was planning his post-retirement finances. In comparison to the usual fixed-income attitude that people have at this stage, this person had a refreshingly well-thought view. He said that most financial advisors had recommended to him that at this point in life, all his money should be in fixed-income assets. But his own opinion was that since the post-retirement phase could last for twenty, thirty or more years, equity was the better option.

Few will agree to this, but he’s absolutely right. The general advice about sticking to fixed income deposits of various kinds being the only safe option for retirees because equity is too risky is wrong. It’s not just wrong, but it’s utterly misguided and any senior citizen following it will head for financial disaster.

Unless you have an independent source of income like rent, that is inherently inflation-adjusted, you are doomed to suffer from old-age poverty. Interest on deposits will not keep up with inflation and the money you’ll withdraw for your expenses will relentlessly eat into the real value of your nest egg. And with equity? Lets take a realistic example. Suppose you had retired in early 1980 with a kitty of Rs 5 lakh that you had invested in a hypothetical investment that tracked the Sensex. Let’s say that your monthly expenses were Rs 3,000 a month, and grew at 10 per cent a year.

After 32 years, your monthly expenses would be Rs 63,000. Not only would you have no trouble funding these expenses, your principal would have grown to Rs 2.7 crore! What about the risk? During these years, the investment would have faced up to steep declines in 1987, 1992, 2001 and 2008 and taken them in its stride comfortably. The lesson is clear—if retirees want to spend their twilight years prosperously, then equity is their only hope.