Allocation including the retirement corpus

Ask "what percentage of my portfolio is in debt?" and the honest answer depends on a question that is easy to skip past: does the retirement corpus count as part of the portfolio, or not?

A retirement corpus is usually earmarked, long-term, and often invested more conservatively than the rest of an investor's money. Including it in an overall debt/equity calculation pulls the blended percentage toward debt. Leaving it out shows only the allocation of the money the investor is actively managing for other goals. Neither answer is "wrong" — but they measure different things, and a case study can ask for either one.

The formula, when the retirement corpus is included:

% Allocation to Debt (including retirement corpus)
  = (Retirement corpus + Debt portfolio) / (Retirement corpus + Debt portfolio + Equity portfolio) x 100

When it is excluded, the retirement corpus simply drops out of both the numerator and the denominator, leaving only the investor's other debt and equity holdings.

The gap between the two figures grows or shrinks depending on how the retirement corpus itself is invested. If the entire retirement corpus is held in debt — a common, conservative default as retirement nears — including it in the calculation always pushes the blended debt percentage up, sometimes substantially, compared with looking at the rest of the portfolio alone.

From a workbook case study on Mr Z, at retirement:

Excluding the retirement corpus — using only the separate debt and equity portfolio — the allocation to debt works out to roughly 69.4% (Rs 1,80,37,404 out of a combined Rs 2,59,98,290).

Including the retirement corpus, reinvested entirely in debt:

% Allocation to Debt = (48,65,914 + 1,80,37,404) / (48,65,914 + 1,80,37,404 + 79,60,886) x 100
                     = 2,29,03,318 / 3,08,64,204 x 100
                     = 74.21%

The same portfolio, on the same day, is 69.4% debt by one measure and 74.21% debt by the other — a gap of nearly 5 percentage points, purely from the decision of whether to fold the retirement corpus into the calculation.

Chapter 20 (Case Studies), Case 1, works through exactly this pair of calculations for Mr Z's retirement portfolio — first the debt/equity split of his other savings alone, then the allocation "if he re-invests the entire retirement corpus in debt", producing the 69.4%-versus-74.21% pair used above. Expect a case-study question that gives separate debt, equity and retirement-corpus figures and asks for the allocation calculated one way or the other — reading which one is being asked for is the actual test.

• Read the question carefully for "including" or "excluding" the retirement corpus — the workbook's own case study asks for both, from the same underlying numbers, and expects two different answers.
• The retirement corpus's own asset mix drives the size of the gap — if it is entirely in debt, including it always raises the debt percentage; a retirement corpus with some equity would move the two figures closer together.
• This is not a rule about what an investor "should" do — it is simply two different ways of measuring the same portfolio, both of which the exam may test.
• Do not confuse this with the earlier working-years allocation table in the same case study, which tracks the equity/debt split of the non-retirement savings before retirement, year by year — the "including/excluding the corpus" comparison is specific to the point of retirement itself.