Distribution stage

The distribution stage is when the corpus stops being fed and starts being eaten.

The workbook's test for a product suitable to this stage is two-fold: the returns must be adequate for the investor's needs, and there must be lower risk to both the income and the principal invested. Protection of capital moves to the front, because the opportunity to add to the corpus after retirement is limited or gone.

That is not a recommendation to sit entirely in deposits. The income has to keep rising with inflation for twenty-five years or more, and a portfolio that cannot grow at all guarantees the income falls in real terms every single year.

Three risks that were harmless during accumulation become live here.

Longevity risk — outliving the corpus. The workbook is explicit that underestimating the years in retirement means there may not be enough money to last.

Inflation risk — the income required is not flat. A retiree drawing Rs 60,000 a month at 6% inflation needs Rs 1,07,451 a month after ten years and Rs 1,92,428 after twenty for the same standard of living.

Sequence risk — a fall early in retirement is far worse than the same fall later, because units are being redeemed into it. The workbook makes the same point mechanically about SWPs: as NAV falls, more units have to be sold to raise the same rupees.

The products the workbook puts in this stage are annuities from insurance companies (immediate and deferred), systematic withdrawal plans from mutual funds, and other periodic-income instruments. The adviser's job is the mix, not the single best product.

Mrs Raghavan retires at 60 with a corpus of Rs 2 crore. She needs Rs 1,00,000 a month in today's money, expects to live to 85 (25 years), and assumes 6% inflation with the corpus earning 8%.

Because the withdrawal rises with inflation, the corpus is discounted at the real rate, not the nominal one:

Real rate = (1.08 / 1.06) - 1 = 1.89% a year

Corpus needed = Rs 12,00,000 a year, inflation-linked,
                for 25 years at 1.89%
              = Rs 2.42 crore

She is short by about Rs 42 lakh, or 17%.

Her choices are arithmetic, not motivational. Draw Rs 82,700 a month instead of Rs 1,00,000 — a 17% cut, for twenty-five years. Or work three more years, which both adds contributions and removes three years of drawdown. Or accept a higher equity weight and the sequence risk that comes with it.

Had she done this sum at 45 instead of 60, closing the gap would have taken roughly Rs 9,000 a month of extra saving over the fifteen years to 60, at the same 11% accumulation return used in Chapter 4's illustrations.

Chapter 5, section 5.3 (Distribution Related Products) opens by defining this stage and setting the two-part test for a suitable product. Chapter 4 supplies the corpus arithmetic, and Chapter 19 compares the distribution products head to head. Module 8 questions ask which stage suits growth-oriented investments (accumulation) and what the distribution-stage product criteria are; case-study questions in Chapter 20 hand you a corpus and a required income and ask whether it lasts.

• A flat withdrawal is the wrong assumption. Corpus questions that ignore inflation during retirement understate the requirement badly — here by about a third.
• An annuity removes longevity risk but not inflation risk, unless the policy is specifically inflation-adjusted or increasing. A level annuity halves in purchasing power in about twelve years at 6%.
• SWP is not interest. Every withdrawal cancels units; a fixed deposit's monthly interest leaves the principal intact. The workbook contrasts the two directly.
• Lower risk does not mean zero equity. A 25-year distribution stage is itself a long horizon, and an all-deposit portfolio locks in a falling real income.
• The corpus is not the plan. Tax on the income, the order in which products are drawn down, and the medical-cost line item all change how long a given corpus lasts.