A 70/25/5 Portfolio, a Withdrawal Request and a Drifted Equity Weight
Mr. Xu, 55, plans to retire at 60. Investable assets are CNY 8 million, now held as CNY 6.24 million equities, CNY 1.36 million bonds and CNY 0.4 million cash - an equity weight that has drifted to 78% after a strong year. His target policy is 70/25/5. From age 60 he will need CNY 300,000 a year, rising with inflation of 2.5%. Assumed returns: equities 8.0%, bonds 3.5%, cash 1.8%; volatilities 18%, 5% and 0.5%. He has only a small state benefit, owns his apartment outright and will not sell it or downsize. A colleague advises switching to 60/35/5 to "lock in the gains". Mr. Xu also asks whether he can raise the withdrawal to CNY 350,000 a year from the start of retirement.
1. Compute the required return and the current expected portfolio return, and judge whether CNY 350,000 a year is affordable.
Read the worked answer
Required return. CNY 300,000 / CNY 8,000,000 = 3.75% real. Converting to nominal at 2.5% inflation: (1.0375 × 1.025) − 1 = 6.34%.
Current expected return at 70/25/5: (0.70 × 8.0) + (0.25 × 3.5) + (0.05 × 1.8) = 5.60 + 0.875 + 0.09 = 6.57%.
Gap: +0.22 percentage points of cushion - roughly CNY 18,000 a year on CNY 8 million. That is thin, not comfortable, and it assumes the assumptions hold.
The CNY 350,000 question. Required return becomes 350,000 / 8,000,000 = 4.375% real, or 7.34% nominal. Against a 6.57% expected return, the shortfall is 0.77 pp ≈ CNY 62,000 a year, before considering volatility. Compounded over a 25–30 year retirement, a persistent shortfall of that size erodes the real capital base materially.
Judgement: CNY 350,000 is not affordable on this portfolio without either accepting a meaningful probability of capital depletion or taking more risk than a 55-year-old with no other income should carry. Offer the honest range: CNY 300,000 indexed is supportable with discipline; CNY 350,000 is supportable only if he also plans to annuitise part of the capital or reduce later spending.
2. Evaluate the 60/35/5 proposal with numbers, including sequence-of-returns risk over the five years to retirement.
Read the worked answer
Arithmetic. 60/35/5: (0.60 × 8.0) + (0.35 × 3.5) + (0.05 × 1.8) = 4.80 + 1.225 + 0.09 = 6.115%. Required is 6.34%, so the proposal creates a structural shortfall of about 0.22 pp ≈ CNY 18,000 a year - it "locks in" a plan that does not fund the stated spending.
The logic behind the suggestion is not wrong, though. Volatility falls: weighted standard deviation drops from roughly 13.1% (70/25/5) to about 11.1% (60/35/5). The point of de-risking is to reduce the chance of a large drawdown right before withdrawals begin, and that is a legitimate concern with a five-year horizon.
Sequence-of-returns risk is the real issue. A 30% equity drawdown on a 70% portfolio is a 21% hit, about CNY 1.68 million on CNY 8 million. If that lands in year 59 or 60 while he is withdrawing CNY 300,000, he sells equities at depressed prices permanently, and the portfolio never recovers the withdrawn capital. The 78% starting weight makes this worse - the current drift is already an unintended risk increase.
Verdict: 60/35/5 is the wrong answer for the wrong reason. It solves a volatility problem the client does have, but via a return that does not fund his spending. The correct fix is to match the withdrawal to the return, not to cut the return below the need.
3. Recommend an implementation: target weight, rebalancing action, liquidity plan and the conditions under which you would revisit.
Read the worked answer
Hold the 70/25/5 policy and restore it. Target equity is 0.70 × 8,000,000 = CNY 5.6 million; current is CNY 6.24 million. Sell CNY 640,000 of equities and move it to bonds. This is disciplined rebalancing, not market timing - and it is the action that actually "locks in gains". Note the policy itself should be re-confirmed with Mr. Xu against his true risk tolerance; if he could not tolerate a 21% drawdown, the policy weight is wrong, not just the drift.
Build a liquidity bucket. Pre-fund years 60–62 with roughly CNY 900,000–1,000,000 in cash and short bonds, funded from the rebalance and the bond sleeve. Spending during a drawdown then comes from cash, not from forced equity sales - this is what actually neutralises sequence risk.
Withdrawal discipline. Commit to CNY 300,000 indexed annually, reviewed each year against portfolio value; a simple guardrail is to freeze the inflation increase whenever the withdrawal rate exceeds 4.2% of current assets.
Revisit if: the return assumptions are revised downward, the withdrawal need rises (health, family support), a drawdown exceeds 15%, or by age 62 the funded ratio shows depletion risk - at which point partial annuitisation converts market risk into guaranteed income.