Life-stage evaluation

People pick the wrong retirement products and have to abandon them later. The workbook says so bluntly, and it names the cost: this damages the corpus they wanted to build.

Its remedy is to stop asking whether a product is good and start asking good for when.

The workbook says one of the best ways to evaluate any retirement benefit product is to consider life stages. It identifies three stages around retirement.

Pre-retirement is the accumulation phase, roughly 15 to 20 years out. Retirement is when income is needed and the corpus must still grow. Post-retirement is the later years, beyond 75.

Each stage wants something different. So the same product can be right in one stage and wrong in the next.

That is the whole idea. An evaluation is only meaningful once the stage is fixed.

The three stages, and what each one is evaluating for.

Pre-retirement. The objective is to accumulate. The investor is 15 to 20 years away from retirement. Other goals exist, but with higher disposable income and no excess income requirement, the risk appetite is higher. The longer horizon allows downside risk to be managed by riding through cycles. The workbook is explicit that any income benefit product may not be a viable option at this phase.

The four evaluation factors it lists for this stage:

The workbook names EPF and NPS as employee benefits that fit these criteria, with PPF and a few mutual fund categories as the other long-term options.

Retirement. The need changes: steady income plus growth of the accumulated corpus. There may be no time horizon for the income requirement, because the need runs for the lifetime. So two types of product are needed — one to generate income, one to grow the corpus.

For the income-generating basket, two factors:

For the growth basket, the horizon is 10 to 15 years and the evaluation factors stay the same as in pre-retirement — but the products may change. The workbook says EPF and NPS may no longer be viable at this point, so the investor may have to rely on PPF, certain mutual fund categories and others.

Post-retirement. The third phase is the later years of life, beyond 75 years. The objective shifts completely to generating income, because a long horizon for growth is no longer viable. Capital protection becomes the primary factor, alongside low return with least risk. One new objective appears: leaving money for heirs, where liquidity may be the primary factor.

The pattern across the three stages.

Take one product — a diversified equity mutual fund — and run it through the three stages for the Bhosale family.

Put figures on the middle stage. At 60 he has a corpus of Rs 90,00,000 and needs Rs 45,000 a month.

The Rs 27,00,000 growth basket can hold the equity fund. The Rs 63,00,000 income basket cannot, because a product that fluctuates the capital fails the capital protection test the workbook sets for that basket.

And the product switch the workbook flags. At 42 his EPF and NPS were natural fits. At 60 the workbook says EPF and NPS may no longer be viable, so the growth basket has to come from PPF, certain mutual fund categories and others. Same four evaluation factors, different products.

At 78 the arithmetic changes again. A 10-year growth horizon is no longer available. If Rs 40,00,000 remains, capital protection becomes the primary factor, and the new objective of leaving money for heirs makes liquidity matter — an illiquid product with a better return is now the worse choice.

What the example shows. Nothing about the equity fund changed across the three verdicts. Only the stage did.

Chapter 6 (Miscellaneous aspects of Retirement Planning), section 6.3 — Criteria to evaluate various retirement benefit products — is built entirely on the three life stages and the factors for each. It is a well-structured section, which makes it easy to set a question on.

Expect the four pre-retirement factors as list recall (cost, return, risk, tax efficiency), the two income-basket factors at retirement (inflation and capital protection), and the numbers: 15 to 20 years to retirement at the pre-retirement stage, a 10 to 15 year horizon for the growth basket in retirement, and beyond 75 years for post-retirement. The two-basket structure at the retirement stage is the conceptual question.

• The retirement stage needs two baskets, not one. Income and growth, evaluated on different factors. Answering with a single portfolio misses the section's main point.
• Beyond 75 is the workbook's post-retirement marker, not 60 or 65. Retirement and post-retirement are separate stages here.
• An income benefit product may not be viable in pre-retirement. The workbook says so expressly; the instinct to buy guaranteed income early is what the stage analysis corrects.
• Capital protection is the criterion that rules out volatile income products, even ones with attractive yields.
• EPF and NPS fit pre-retirement but may not be viable at the retirement stage. The workbook shifts the growth basket to PPF and certain mutual fund categories instead.
• Cost is listed first among the pre-retirement factors, and the workbook adds that in some products the total cost may not even be clear.
• Liquidity enters only at the post-retirement stage, tied to the objective of leaving money for heirs. It is not one of the four pre-retirement factors.
• The horizon figures are not interchangeable. 15 to 20 years is the distance to retirement; 10 to 15 years is the growth basket horizon inside retirement.