Case 077Lump-sum allocationCore
A 67-year-old retiree places Rs 6 crore with you, draws a pension of Rs 9 lakh a year and spends Rs 18 lakh. How would you invest the money? Size the reserve, the income sleeve and the growth sleeve.
1The situation
Harihar Bhavsingh is 67, retired, owns his home outright and has no loans. He has placed Rs 6 crore with you after selling a business property. His pension pays Rs 9 lakh a year and rises with prices. His household spends Rs 18 lakh a year. He wants the money to last his life and his wife's, and says he would like something left for his two children but it is not the priority.
Assume spending also rises with prices, so the gap stays the same in real terms. Use illustrative long-run returns only where needed; nothing below depends on a return forecast.
2Your task
How would you split the Rs 6 crore, and what does each part do?
Quick check
What share of the Rs 6 crore does Harihar actually need to draw each year?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Put two years of the gap in a reserve, eight more in a ladder, and let the rest grow: Rs 18 lakh, Rs 72 lakh, and about Rs 5.1 crore. The pension covers half his spending, so the portfolio funds only Rs 9 lakh a year, a 1.5% draw. With ten years of withdrawals held outside equity, he can hold Rs 3 crore in equity and ride out a 30% fall without selling.
Step 1What number sets the allocation before any product is named?
The gap. A household where one salary pays half the bills and savings pay the other half does not need its savings to do everything, only the half the salary leaves. Harihar's pension already pays Rs 9 lakh, so the portfolio's job is the other Rs 9 lakh, which is 1.5% of Rs 6 crore a year. That single ratio tells you he has far more capacity for risk than his age suggests. A candidate who starts from his age alone would put him in a conservative model and give up years of growth he can afford.
Step 2How big should the reserve and the income sleeve be?
Size them in years of the gap, not in percentages. Two years of the gap, Rs 18 lakh, sits in a sweep account and a liquid fund, and years three to ten, Rs 72 lakh, sit in a ladderA set of deposits or bonds maturing one after another, one each year, so a known sum falls due when it is needed. of deposits and high-quality bonds. That is Rs 90 lakh, ten years of withdrawals, that never has to be sold in a bad market. Everything else can be judged on a ten-year horizon or longer.
Step 3How much of the rest goes into equity?
Capacity says a lot; willingness at 67 usually says less, so split the remaining Rs 5.1 crore. Rs 3 crore in diversified equity, half the whole portfolio, and Rs 2.1 crore in medium-term debt and hybrid funds. Now test it. A 30% equity fall costs Rs 90 lakh, 15% of the portfolio, and ten years of withdrawals are already sitting in the reserve and ladder. Nothing has to be sold at the bottom, which is the real protection a retiree needs.
| Sleeve | Rs lakh | Share | Job |
|---|---|---|---|
| Reserve | 18.0 | 3% | Gap for years 1 and 2 |
| Ladder | 72.0 | 12% | Gap for years 3 to 10 |
| Debt and hybrid | 210.0 | 35% | Refills the ladder, dampens swings |
| Equity | 300.0 | 50% | Growth, the children's share |
| Total | 600.0 | 100% |
Step 4What would change the answer?
The pension's indexation. If the pension were fixed, the gap would not stay at Rs 9 lakh: with prices rising 6% a year, spending reaches about Rs 32 lakh in ten years and the gap becomes about Rs 23 lakh, a 3.9% draw on today's corpus. That is the first question to ask him, because it moves him from comfortable to needing real growth. Close with the view: the plan is built around his cash flow, and it is refilled each year from the debt sleeve, not from equity after a fall.
Where candidates lose it
The usual loss is answering from age: 67, so 30% equity, and never computing the gap. The pension changes everything, and an interviewer who gave you the pension figure wants to see you use it in the first minute.
The second is sizing sleeves in percentages pulled from a model. Sizing in years of withdrawals is what lets you say, with a number, why the client will not have to sell in a crash.
What the interviewer asks next
- Harihar's wife is 60 and would receive half the pension if he died first. How does that change the plan?
- How would you refill the ladder each year, and from which sleeve?
- He wants Rs 1 crore of the equity in a single stock he knows well. What do you say?
Asked at Northern Trust, Wealth Management, Lake Forest, 2022 (Wall Street Oasis): If you had $1 million placed in your account, tell me how you would invest it
Company names and figures are illustrative.