How to Structure a Portfolio You Are Living Off

Lakshmi's portfolio did not change; her position did

Lakshmi retired holding roughly what she held the year before. Same funds, same split, same platform. Nothing about the portfolio announced that anything had happened.

Everything about her relationship to it had. While she was working, the portfolio's job was to grow, its bad years were absorbed by an income that arrived regardless, and a fall was a paper event she could wait out. Now the portfolio is the income. A fall is not a paper event, because she is selling into it every month to eat.

The assets did not become riskier. The consequences of their falling did, and a structure that was appropriate for one situation needs rebuilding for the other.

Three jobs, in order of urgency

The useful way to organise money that is being spent is by when it will be spent, which produces three distinct jobs.

The near money funds the next few years of withdrawals, and its only requirement is to be there. Return on this portion is close to irrelevant; what matters is that its value does not depend on market conditions at the moment Lakshmi needs it. This is the part that lets her decline to sell equity during a fall, which is the single most valuable property the whole structure has.

The middle money funds the years after that. It can carry some volatility because it has time to recover, and its role is to refill the near money as that is spent down.

The long money funds the last stretch of a retirement that may run for decades, and it should still be growing. This is the part people get wrong in the cautious direction: money that will not be touched for twenty years, held in something safe, is being slowly consumed by inflation. A retirement is long enough that inflation, not volatility, is the larger threat to the far end of it.

Whether that is organised as formal buckets or simply as an allocation with a rule attached matters much less than that the near money exists and is genuinely stable.

Why the near money earns its keep

It is worth being explicit about what those few years of stable money are actually buying, because they look like a drag on returns and are not.

A retiree who must sell equity every month has no choice about when to sell. A retiree with three years of spending in stable assets does: when markets fall, she spends from the stable part and leaves the equity alone to recover. She has converted a forced sale into an optional one.

That is precisely the mechanism that the sequence-risk experiment shows to be decisive — there, the same returns in a different order emptied a withdrawing portfolio or left it larger than it started, and the damage came entirely from selling during declines. The stable allocation does not improve returns. It removes the mechanism by which a bad ordering does permanent harm, which is worth considerably more.

The size of it should come from how long a recovery might take rather than from a rule of thumb, and Indian equity has taken a long time to recover on occasion — the record is in the uncertainty of long-term equity returns.

What changes about the assets themselves

A few properties matter more after retirement than before, and they are not the ones usually discussed.

Liquidity becomes a requirement rather than a preference. Anything that cannot be converted to cash in a few days, at a predictable price, cannot be part of the near money — and which holdings have lock-ins, notice periods or exit charges is worth knowing before the money is needed rather than at the point of asking.

Simplicity stops being an aesthetic choice. A structure Lakshmi can describe from memory is one she can maintain into her eighties and one somebody else can take over if she cannot. A portfolio spread across many holdings and several platforms is a genuine liability at that stage, and consolidating it while she is well is far easier than having it consolidated for her later.

Concentration deserves a fresh look, because a holding that was an acceptable risk against a salary is a different proposition against no salary. That includes property, which is dealt with in real estate in a retirement plan.

And the operational layer needs attention nobody enjoys giving it: current nominations on every holding, a written record of what exists and where, and at least one other person who can find it.

The refill rule, which is the part usually missing

A three-part structure is not finished until Lakshmi knows how money moves between the parts. Without that, the near money drains and nothing replaces it.

The rule can be simple, and simple is better than optimal here. Once a year, at a set date, top the near money back up from whichever part has done best — which in a good year means selling equity that has grown, and in a bad year means leaving equity alone and drawing on the middle. That is rebalancing and refilling in one action, and it produces the behaviour a retiree wants without requiring a forecast.

What it must not become is a decision made in the moment. A refill postponed because equities feel too cheap to sell is a timing view, and it is the point at which the structure stops protecting her, because the near money runs down while she waits for a better price that may not arrive.

Reviewing it

Once a year, three questions, in this order.

What does the year actually cost now — and has that changed, particularly on the medical side? What remains, and does it still support what is left to spend? And is the near money still holding the number of years it was supposed to?

That third question is the one that catches problems early, because the near money is the first thing to erode and the last thing anyone checks.

Then the harder judgement: if the answers have moved against her, the levers are spending less, spending more flexibly, or taking a different amount from the portfolio. Changing the investments is rarely the answer, and reaching for a higher expected return to close a gap adds volatility at the point of maximum vulnerability, which is the trap set out here.

What to take away

A portfolio being spent needs organising by when the money is needed, not by what it holds. Several years of spending in genuinely stable assets, a middle layer to refill it, and a growth layer for a retirement that may run for decades — because inflation, not volatility, is what threatens the far end.

The stable part is not a drag; it is what lets you decline to sell equity during a fall, which is the mechanism that does the real damage. Require liquidity, cut the number of holdings while you are well, revisit any concentration now that there is no salary behind it, and keep nominations current. Write down how the layers refill, do it on a date rather than on a view, and review the cost of the year, the amount remaining and the depth of the near money once a year.