Retirement is a pending truth and yet so many people pay attention to it only after a certain period. Many people focus on building their corpus so much that they forget how much they must relegate towards post-retirement expenses. No doubt, investing in equities over a prolonged tenure, say 20-25 years yields the desired returns.
However, there is no escaping the market volatility in the long run, which means that you must know when to reduce your exposure to equities and slowly pick up your pace regarding debt investments.
Moving from equities to debt
“When do I want to retire?” is a question that you must be willing and ready to answer. Ask yourself if you want to retire early or slog like your financially ignorant peers. Once you are aware of your retirement age, you can then decide how much risk you must take. This will help you assess and decide the extent of exposure to equities and debt instruments.
When asked how people planning their retirement must start reducing their equity exposure and start investing more in debt instruments, Viral Bhatt, Founder, Money Mantra said, “There is no one-size-fits-all answer to this question as it depends on a variety of factors, including an individual’s financial goals, risk tolerance, and overall financial situation. Typically, as individuals approach retirement age, they may start to shift their investment portfolio towards less risky assets, such as bonds and other fixed-income securities. This is because these investments tend to be less volatile than stocks and can help protect against market downturns.”
“However, it’s important to note that even in retirement, individuals may still want to maintain some exposure to equities in order to potentially generate higher returns and keep pace with inflation. The specific allocation between stocks and bonds will depend on an individual's goals and risk tolerance. In general, I often recommend that individuals start to shift towards a more conservative investment portfolio around five years to a decade before retirement,” adds Bhatt.
Rishabh Parakh, Chief Play Officer, NRP Capitals explained, “Determining the ideal age to start reducing equity exposure and increasing investments in debt instruments for retirement planning is a subjective matter that depends on various factors, including individual goals, risk tolerance, and financial circumstances. However, there are a few general guidelines to consider:
Time Horizon: The longer your time horizon until retirement, the more potential there is to recover from market downturns. Therefore, younger individuals typically have a higher capacity to take on risk and maintain a higher equity exposure.
Risk Tolerance: Assess your personal risk tolerance, which refers to your comfort level with market fluctuations and potential losses. If you have a low tolerance for risk, you may want to reduce equity exposure and shift toward more conservative investments, such as debt instruments, earlier in your retirement planning.
Diversification: Diversifying your investment portfolio is important at all stages of life. While reducing equity exposure, it is still essential to maintain a diversified portfolio that includes a mix of asset classes, including stocks, bonds, and other debt instruments, to spread risk and potentially enhance returns.
Financial Goals: Your retirement goals, such as desired income level, lifestyle, and expenses, should also influence your investment strategy. If you have specific income requirements or anticipate a need for more stable returns, gradually shifting towards debt instruments may be appropriate.”
When it comes to retirement planning, Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners, firmly believes in the adage, “To each his own”. This explains why Sadagopan expressed, “It is recommended to start the equity exposure reduction gradually a few years prior to retirement and increase debt-oriented investments.”
Planning for retirement early in life is necessary. However, you must adopt flexibility in your planning considering that the right equity-to-debt proportion is necessary not only to create wealth but also to preserve it in the long run.