Retirement brings a fundamental change in how investors should manage their savings. While equities can help build wealth during working years, a sharp market correction after retirement can put years of accumulated savings at risk, particularly when investors depend on their portfolios to meet monthly expenses.
For someone retiring at 60, the challenge is not simply earning higher returns. It is ensuring that the retirement corpus lasts another 20 to 30 years, even as inflation pushes up household expenses and markets go through periods of volatility.
So, how much of a retirement portfolio should remain invested in stocks and equity mutual funds?
According to M. Pattabiraman, founder of personal finance platform Freefincal and professor at IIT Madras, a typical retiree should consider limiting equity exposure to 30% of the retirement corpus. Those with substantially larger savings than required may have greater flexibility to take equity risks.
In a Freefincal report, Pattabiraman outlined three principles for determining equity allocation after retirement, focusing on corpus size, inflation-adjusted returns and the ability to withstand prolonged market downturns.
How much equity is appropriate after retirement?
During their working years, investors may hold 50-70% of their portfolios in equities to benefit from long-term market growth. However, Pattabiraman argues that this allocation needs to be reconsidered once regular withdrawals begin.
His framework suggests keeping equity exposure below 30% for a typical retirement, although the appropriate allocation depends on the size of the corpus and the investor’s financial circumstances.
For instance, consider two retirees who each need ₹6 lakh annually to meet expenses. One has accumulated ₹1.8 crore, equivalent to 30 times annual expenses, while the other has ₹4.5 crore, or 75 times annual expenses.
The second retiree has a much larger financial cushion and may be better positioned to withstand equity market volatility. These are illustrative examples, not specific portfolio recommendations.
Freefincal’s retirement planning tool also suggests different equity allocations depending on the retirement age.
|
Retirement age |
Illustrative equity allocation |
| 60 years | 20% |
| 55 years | 22% |
| 50 years | 30% |
| 45 years | 32% |
| 40 years | 34% |
| 35 years | 36% |
| 30 years | 37% |
| Source: Freefincal retirement planning illustration for an individual currently aged 26. These allocations are scenario-specific. | |
Even someone retiring at 30 has an illustrative equity allocation of just 37%. Early retirement means a longer period of withdrawals and greater exposure to multiple market cycles.
Why inflation and market crashes matter for retirees
Pattabiraman also cautions against assuming that retirement investments will consistently generate returns above inflation. He recommends planning with a post-tax real return of no more than zero, or even a negative real return of 1-2% for a more conservative estimate.
For example, if inflation averages 6%, a zero real-return assumption means investment returns merely keep pace with rising living costs.
Another concern is sequence-of-returns risk. If markets fall sharply during the initial years of retirement, investors withdrawing money for household expenses may be forced to sell equity investments at depressed prices.
Even if markets subsequently recover, the withdrawals made during the downturn could permanently weaken the portfolio. This is why Pattabiraman’s approach prioritises controlling equity exposure rather than depending on higher market returns to fund retirement.
Can a 15-year income buffer protect retirement savings?
Pattabiraman’s third principle involves building sufficient fixed-income resources to support inflation-adjusted expenses during the first 15 years of retirement.
If this is achievable, retirees can consider a bucket strategy, separating money needed for regular expenses from investments intended for longer-term growth. Under this approach, a 20-30% equity allocation could potentially remain untouched for several years, reducing the need to sell stocks or mutual funds during market downturns.
He also suggests considering pension plans or multiple annuity income streams alongside the bucket strategy to strengthen retirement income security. However, retirees must account for inflation because fixed-income products do not necessarily provide income that rises with living costs.
The broader takeaway from Pattabiraman’s analysis is that retirement portfolios should be designed around the sustainability of withdrawals rather than maximising investment returns.
For someone approaching retirement, the decision on equity exposure should therefore depend on the retirement corpus, expected expenses, available fixed-income resources and ability to withstand market volatility.