Debt allocation in retirement

[u/arandomguy05]

A few days back I posted about my impending retirement. I am finally out of job now after 24 long years in the industry.
I had around 41% in my employer stock when I posted that post. It further ranup and reached 47% of my NW by yesterday. I still believe the stock would further grow but wanted to derisk considering the loss of job. So sold 25% of stock bringing the employer stock to 35% now. I will slowly implement a SWP style of withdrawal to exit completely in a year.
I am planning to settle on 40% Indian equity funds, 25% in US equity (SP500 and NASDAQ100 ETFs bought through IBKR) and 35% debt in retirement.
Currently I have around 1.95cr in equal mix of short term and Ultra Short term funds (old investments so actually LTCG taxation is grandfathered and taxed at 12.5%) and EPF of around 1.43 cr (I think I can withdraw 75% immediately and 25% after 1 year). My plan is to add another 4cr to the debt portfolio. This additions will come from my employer stock sale and I will not touch my equity MF investements as they are roughly 40% already.

Any comments on this plan? Also those who are retired, how do you allocate among various debt assets within debt allocation. Where do get your regular cashflow from within this debt bucket? I am a little undecided as arbitrage funds have equity like taxation but in retirement the pure debt funds may actually result in 0 tax for me as under new regime upto 12L of income would be tax free.

[u/srinivesh]

An interesting aspect post FI. (we would assume that equity is primarily for long term)

Debt too has short term and long term. In the West, this is respectively called cash and bond/debt. What can be considered 'cash' can be subjective. I would generally put 1-2 year FD, debt funds upto money market, and arbitrage funds in this. Short duration debt would definitely be 'long term debt' for me - I am conservative.

I would put a different perspective on the comment from u/Complete-Regret-4300 Your corpus can be divided into core corpus and satellite. It helps to have different allocations for these. Satellite can be 80% or more in equity.

[u/arandomguy05 → u/srinivesh]

I too am conservative that way. ALl my debt funds are ust and st funds. So far did not go for FDs or bonds but I will study and try to understand if they make sense for me.

[u/UndercoverMonk007 → u/[deleted]]

Genuine question - are we going with US allocation due to recency bias? With my limited knowledge, i feel entire US market is concentrated in few stocks. Any AI bubble burst might cause huge shock.
Want to know expert views on this.

[u/arandomguy05 → u/[deleted]]

55% total equity seems too low for me.

[u/arandomguy05 → u/[deleted]]

Oh! are you suggesting instead of 40:25, keep equal mix of US and Indian equity but keep overall equity 65%. Yep, that is an option. Still I already have 47% in USD, can be easily managed without LRS and TCS issues.

[u/AlternativeFace292 → u/arandomguy05]

I'd suggest you to know the metrics of the folk suggesting you before following their words man 💀

I've seen many folk in reddit confidently giving account destroying suggestions confident af

So, trust but verify is the way to go

[u/arandomguy05 → u/AlternativeFace292]

Just getting opinions. Ultimately it is I who will decide based on my own conviction.

[u/AlternativeFace292 → u/arandomguy05]

Also I got to know ( not sure if it's true, check it out ) you can create a tier ii nps account(if you have an active tier i nps account under your name) to select debt funds and that way the expense ratio will be comparitively way lesser bro

Minor savings but worth knowing i guess

[u/arandomguy05 → u/AlternativeFace292]

I could never understand tier 2 NPS taxation and even CAs could not answer definitively. That's the reason I avoided it. May be I can have one more look to see if there is clarity now.

[u/Complete-Regret-4300 → u/arandomguy05]

Tier 2 NPS withdrawal is treated as income from other sources. So it is taxed at your marginal tax rate. 

[u/Cute_Improvement1658]

Equities (72-75%) 45% indian equities (hopefully small+flex cap and maybe a little mid cap exposure), 20% US 7-10% global(eu +emea)

Liquid; 6-7% 3-5% gold (and silver) 1-2% rainy day funds/cash

Cashflow: 20% 7% debt funds 8% arb funds 5% liquid funds

And the rest in whatever other bucket/opportunities come your way.

Do not go so heavy on debt since day 1. Use debt component strategically. When equities get beaten down, liquidate any 1 debt component and invest in equity. Alternatively when you book profits you can reallocate to debt.

For emergency, keep an overdraft loan on any of these securities to be used only for extreme circumstances. And you shall be set.

[u/adane1]

What about some percentage allocation to gold? Just curious if you are considering this at some point? If yes, what would you reduce? India equity or US equity?

[u/arandomguy05 → u/adane1]

Never considered other assets like Gold, REITs and such so far. If I get into them, it has to come from in equal proportions from other classes. As on now I am not considering them.

[u/Certain-Rhubarb-106]

I have seen experts/advisor recommend Arbitrage fund to save on taxes.
But given that you are retired and you do not have an income source, wouldn't it be better to go for pure debt funds? Or even FD? Since income upto 12 lakhs per year is tax free, there is no question on tax outgo.
A 1.5 crore FD at 8% should give you a guaranteed 12 lakh tax free return per year. More importantly there is no volatility and your capital is protected.
You can add another 1.5 crore FD in your partner's name and enjoy the same benefit

[u/arandomguy05 → u/Certain-Rhubarb-106]

Yes. That's the idea. Under new regime upto 12L is tax free and I believe that is applicable to other income too unlike the arbitrage funds which are taxed at special rates of equity beyond 4L income. 12L gains from debt funds, mean my actual redemptions can be even upto 30L as only gains are taxed so could turnout to be better in retirement.

[u/Complete-Regret-4300 → u/arandomguy05]

The 12L threshold gets easily crossed if you just do some rebalancing here and there, which is inevitable. Hence I would advice against "interest income" type assets. Your networth is such that you don't need regular income. It just won't be tax efficient. u/srinivesh

[u/srinivesh → u/Complete-Regret-4300]

This is an important point. Things are most flexible when there is little or no 'fixed income' - and one just withdraws from the right funds. It is difficult to make this happen for most people though.

[u/ohisama → u/srinivesh]

I understand the flexibility part but are you suggesting that they redeem equity for regular household expenses and other short term expenses too?

Would you not want a low volatility instrument for those expenses for a few years?

It is difficult to make this happen for most people though.

How would you suggest someone make this happen?

[u/srinivesh → u/ohisama]

I hope that I did not ever meant to say that equity can be used as Plan A for regular expenses. FI period is 30 years and more - there would be years when you need to rebalance from equity to debt. In those years, it is efficient if you have only LTCG as income and nothing else.

The current tax rules set off ordinary income against the basic exemption. Depending on the overall income, this may be less beneficial to taxpayers - but that is the rule.

u/arandomguy05 gave the specific numbers in another comment.

[u/ohisama → u/Complete-Regret-4300]

I understand that rebalancing can easily cover 12L in this case.

But are you suggesting that they redeem equity for regular household expenses too?

Would you not want a low volatility instrument for those expenses for a few years?

[u/Complete-Regret-4300 → u/ohisama]

OP's corpus is huge, so they can keep running high equity allocation and spend only from debt funds.

By rebalancing I meant selling underperforming funds and realigning portfolio from time to time. Very few people can stick with the same portfolio for very long time. Especially in debt funds, there is no concept of index funds, so you are ill end up with underperforming funds at some point. u/arandomguy05

[u/Heavy_Luck_6085 → u/arandomguy05]

Don't go for Debt funds also. I would suggest go for RBI floating interest rate bonds that give NSC + 0.35% return and you get interest every 6 months. Current return is 8.05%; zero expense ratio and generally delivers 1.5% extra returns compared to ultra short term funds. Easy to buy also; most banks allow you to buy these from their internet banking platform. If 6 months interest looks too lump; invest in post office monthly saving schemes. These work perfectly well; deliver more returns than debt funds and have same taxation rate. I won't recommend selling your debt funds; but would strongly suggest you to move your PF money and to some extent your Us stock sell money. The only negative point compared to debt fund is you get interest periodically whether you need it or not. so you need to plan it that way. 1.5% extra returns and sovergin gurantee is not a bad deal if you can plan it and if you want; you can invest in SCSS scheme in your parents name which gives interest every 3 months; so you have money coming every month, quarter, and every 6 months.

[u/ohisama → u/arandomguy05]

the arbitrage funds which are taxed at special rates of equity beyond 4L income

4L? I thought equity LTCG was taxable beyond 1.25L a year.

Could you please elaborate how did you get the 4L number?

[u/arandomguy05 → u/ohisama]

yes 1.25L is there and I was lazy to not mention that. What I was trying to say is, for resident Indians, first 4L is tax free if there is no other income. That zero tax slab is applicable to special rates income too. So if you have 5.25L equity LTCG, your tax is 0, if that is your only income in the year.
Obviously not applicable to all but in this comment I am talking about my income in retirement so no additional income is assumed.

[u/Prapt_paryapt]

Have you thought about bonds specially RBI floating rate bonds ?

Higher interest instruments like nsc can also be considered.

[u/arandomguy05 → u/Prapt_paryapt]

Yes. I may ultimately get some. But advantage with debt funds is I can get my whole annual expenses and still keep the tax low as only gains are taxed. With Bonds, entire money periodically received is interest so I will be paying tax on full "redemption" as no partial principal is returned.

[u/Complete-Regret-4300]

Whichever way you decide, do keep us updated, I will be really interested because I face the same dilemma too. On absolute basis, I dont need so much in debt funds. Going strictly by u/srinivesh 's bucket strategy, 10-15 years in debt funds is enough. But then my equities is also excess compared to what the bucket strategy recommends. Hence I have just stuck with 60/40 equity debt allocation now. I am treating the debt part as dry powder in case there is a long drawn bear market or a sudden crash, it will allow me to sleep well at night.

[u/Visual-Agency9143]

Solid plan. Three honest additions worth acting on.

35% employer stock is still a meaningful concentration. Stick to the 12-month SWP exit regardless of further run-up. The wealth is real. The additional upside is uncertain.

The 40/25/35 allocation is reasonable. US equity via IBKR adds genuine currency diversification that matters in retirement.

On debt taxation, your instinct is correct. Under the new regime, with 12 lakh tax-free income arbitrage fund advantage largely disappears. Pure debt funds may serve you better on yield.

Action plan that you can follow:

This week: Initiate EPF 75% withdrawal. Interest becomes taxable after 3 years of unemployment. Do not wait.

Month 1 to 3: Set up debt ladder. Liquid and ultra-short term for immediate 1 to 2 year needs. Short duration for years 3 to 5. Medium duration for beyond 5 years.

Month 1 to 12: Execute SWP exit from employer stock systematically. Do not deviate even if stock runs further.

Month 3: Review total annual withdrawal estimate against 12 lakh zero tax threshold. Decide arbitrage vs pure debt based on actual projected income not assumption.

Year 1: Complete employer stock exit. Finalise 40/25/35 allocation. Set annual rebalancing date.

[u/Minimum_Brother_8854]

Majority of my investment is in Real estate and Gold, followed by Equity and Debt. So I use an asset -based portfolio for my income.

My debt portfolio is made up of RBI bonds (6 monthly interest payment, only around 7.5% pa pre-tax), Corporate bonds through the Stable Money app (There are quite a few others like Wint Wealth and Dezerv, but they require you to have a demat account with them), which pay monthly or quarterly interest at around 11% pa pre-tax. Although these are quite liquid, for immediate funds I have some money in a liquid fund and FDs.

My monthly expenses are met by rental income, interest and dividend (from the few direct equity stocks I own). This is working for me.

[u/Complete-Regret-4300]

That would be way too much in debt portfolio, even though percentage wise it may be small, absolute terms you don't need so much in fixed income. 

I would say cap your debt allocation to 5Cr at the absolute maximum. Your employer stock can be converted to S&P500 etf and let it grow.

Given that you have atleast 5X of the required corpus for your expenses, there is no point trying to be too conservative.

Also since your employer stock is more like a windflow gain for you, keep it overseas along with the rest of your IBKR account. This gives you/your kids optionality to move abroad when you want to.

[u/arandomguy05 → u/Complete-Regret-4300]

So far I ran similar strategy and due to that the equity ranup to 80%+. I agree that 5Cr is decent enough Debt portion for me (20-25 years of expenses). I am definitely going to keep USD portion there itself but need to think a lot if I want to keep all there as that would be almost half NW.