The Aggressive Score on a Retirement Corpus
Mrs. and Mr. B, aged 68 and 65, retired, have ₹80 lakh of retirement savings, a monthly pension of ₹45,000 and household expenses of ₹65,000. They need about ₹20,000 per month from the corpus to meet the gap. Their daughter's wedding is estimated at ₹15 lakh in three years. They have no dedicated emergency fund and health cover of only ₹5 lakh. Their risk questionnaire score is 72/100, labelled aggressive, because both have 10 years of direct equity experience and say they can tolerate a 30% fall. A relationship manager has proposed 70% in small- and mid-cap equity to earn 12% annually and cover the monthly withdrawal. The couple is impressed by a fund that returned 28% last year and wants to invest ₹60 lakh there. They have not considered what happens if equity falls 30% while they are withdrawing.
1. Evaluate the suitability of the 70% small- and mid-cap equity proposal. Distinguish risk tolerance, risk capacity and risk need.
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Risk tolerance is psychological willingness to accept volatility; the questionnaire score of 72 measures that. Risk capacity is the financial ability to absorb losses without derailing goals; here it is low because ₹20,000 per month is being withdrawn, ₹15 lakh is needed in three years and health cover is thin. Risk need is the return required to meet goals; a 12% target is not a justification for taking unaffordable risk. A 30% fall on ₹60 lakh is an ₹18 lakh paper loss. If withdrawals continue from a depressed portfolio, the couple locks in losses and may run out of money earlier. A 70% small- and mid-cap allocation also exposes them to liquidity and drawdown risk just before the wedding outflow. The proposal is not suitable despite the questionnaire label. The label must be overridden by capacity and documented. A suitable plan would first protect near-term cash flows, then take equity risk only on the surplus that is not needed for several years.
2. Construct a practical bucket plan for the couple and state what should be documented.
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Use a three-bucket approach. Bucket 1: keep at least 24-36 months of the monthly gap and expenses in liquid funds, short-duration debt or a sweep account; this avoids forced equity sales. Bucket 2: place the ₹15 lakh wedding money in instruments maturing or de-risking before the three-year date, such as targeted duration debt or arbitrage, not equity. Bucket 3: invest the remaining long-term surplus in a diversified equity plus debt portfolio, with equity exposure limited to the amount the couple can leave untouched through a deep drawdown. Separately, review health insurance: ₹5 lakh is inadequate for their age, so a senior-citizen policy or top-up should be considered. Document the questionnaire score, the capacity analysis, the override rationale, the bucket amounts, the product selection rationale and the client's informed consent. Record the discussion that a high past return is not a promise and that withdrawals during a fall create sequence-of-returns risk.