Why equity is your rocking chair in retirement

As soon as retirement kicks in, many people bid adieu to equity for the rest of their lives. They believe it's time to reap the rewards of their patient efforts. It is this cautious mindset of ' Bilkul ricks nahi lene ka ' (absolutely no risk-taking), that often gravitates retirees towards building an all fixed-income portfolio. The only problem? This is the real risk! By going all-debt, you may run out of money. This may happen because inflation-adjusted returns given by fixed-income instruments are quite lean. If you add tax to the mix, the real return is hardly anything. Therefore, we always advise people to not ditch equity in their retirement years. At this point, you may ask: "What about volatility? Afterall, equity returns can even be negative." This story answers this question. But first, it's important to understand the importance of equity in retirement planning. No equity = Risk of running out of money Suppose you retire today at the age of 60 with your retirement corpus of Rs 1 crore invested in a bank fixed deposit (yielding 7.5% p.a.) to generate regular income. And your monthly expenses are Rs 50,000. Here is how your income and withdrawal plan would transpire: Year 1 : While your annual withdrawal is Rs 6 lakh (50,000*12), you earn an interest income of Rs 7.05 lakh. (Please note the interest is not Rs 7.5 lakh because we are assuming you'd take out your annual expenses for Year 1 before you invest). Year 2 : Due to inflation, your monthly expenses will increase. That means you would need more than Rs 6 lakh to enjoy the same standard of living. In India, the cost of living has been increasing 6 per cent on an average in the last 20 years. Considering this, you would now have to withdraw Rs 6.36 lakh, while the interest income is Rs 7.10 lakh. That's still decent. Now, let's fast-forward to.... Year 7 : Now, the annual income you need is Rs 8.5 lakh against interest income of Rs 6.9 lakh. The interest income has reduced because the annual expenses have started eating into the corpus by this time. Also, what this means is the interest income is no longer sufficient to meet your annual expenses. But this is not the worst part yet. With rising expenses each year and declining interest income, your