Archive / Investment Adviser (Level 2) / Miscellaneous Aspects of Retirement Planning

nism-series-xb-portfolio-allocation-stability-across-pre-retirement-years[ INVESTMENT ADVISER (LEVEL 2) ]

Throughout Mr. Z's 8 pre-retirement years (deploying 80% of net savings to debt and 20% to equity, with equity earning 15% and debt earning 8.5%), how does his general portfolio allocation behave between age 52 and age 60?

[ A ]Debt increases from 10% to 90%, while equity drops to 10%

[ B ]Equity allocation collapses to 0% due to the age 55 outflow

[ C ]The allocation remains remarkably stable around 69.4% to 70.1% in debt and 29.9% to 30.6% in equity, because higher equity growth (15%) offsets the smaller 20% annual savings inflow[ CORRECT ]

[ D ]Debt allocation fluctuates wildly between 20% and 80% every year

Takeaway

Despite 80% of new savings flowing to debt, Mr. Z's overall allocation stays remarkably stable around 69-70% debt and 30-31% equity throughout the 8 pre-retirement years, because equity's higher 15% return offsets its smaller cash inflow, so option C is correct.

Derivation

Debt receives the larger share of new annual savings (80%) but grows at only 8.5% p.a., while equity receives a smaller share (20%) but compounds at a much higher 15% p.a. These two effects roughly offset each other, so the case study table shows debt allocation moving only narrowly, from about 70.06% at age 52 to 69.38% at age 60, with equity correspondingly stable near 30%. This tests a subtler portfolio-mechanics insight: cash-flow weighting and compounding-rate differences can pull an allocation in opposite directions and largely cancel out, meaning a portfolio can look 'static' in percentage terms even while every underlying rupee amount is growing substantially.

Why the others fail

A — Debt increases from 10% to 90%, while equity drops to 10%

Debt allocation does not rise anywhere near 90% because equity's faster 15% compounding continually offsets the larger cash inflow directed to debt.

B — Equity allocation collapses to 0% due to the age 55 outflow

The equity balance actually grows from Rs. 15 Lakhs to Rs. 79.61 Lakhs across the period; it never collapses to 0% even accounting for the age-55 outflow.

D — Debt allocation fluctuates wildly between 20% and 80% every year

Disciplined systematic annual deployment, as modelled in this case, produces smooth and stable year-over-year allocation percentages, not wild 20-80% swings.