Retirement changes the way people need to manage their investments. During their working years, investors can focus on growing wealth through equities and mutual funds. After retirement, however, protecting accumulated savings becomes equally important, particularly when investment withdrawals are needed to cover regular expenses.
For someone retiring at 60, the challenge is to make their retirement corpus last for another 20 to 30 years while managing inflation, healthcare costs and market fluctuations.
So, what proportion of retirement savings should remain invested in stocks and equity mutual funds?
M. Pattabiraman, founder of the personal finance platform Freefincal and a professor at IIT Madras, suggests that a typical retiree consider keeping equity exposure below 30% of the retirement corpus. People whose savings substantially exceed their expected retirement needs may have more flexibility to take investment risks.
In a Freefincal report, Pattabiraman outlined three key considerations for retirement portfolios: the size of the accumulated corpus, inflation-adjusted returns and the ability to withstand extended market declines.
How Much Equity Should You Hold After Retirement?
Investors often maintain equity allocations of 50% to 70% during their earning years to benefit from long-term market growth. Once retirement begins and regular withdrawals start, that approach may need to change.
Pattabiraman’s framework suggests limiting equity exposure to below 30% for a typical retirement, although the appropriate allocation depends on an individual’s financial position and spending requirements.
Consider two retirees who each need ₹6 lakh annually to meet their expenses. One has accumulated ₹1.8 crore, equal to 30 times annual expenses, while the other has ₹4.5 crore, equivalent to 75 times annual expenses.
The second retiree has a larger financial cushion relative to their spending needs and may therefore be better positioned to tolerate market volatility. These examples illustrate how the size of a retirement corpus can influence investment decisions; they are not individual portfolio recommendations.
Freefincal’s retirement planning tool also provides illustrative equity allocations for different retirement ages.
| 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 figures apply to a specific planning scenario and are not universal recommendations.
The illustration shows that even someone retiring at 30 has an equity allocation of only 37%. Early retirement can require savings to support withdrawals over a much longer period, exposing the portfolio to more market cycles.
Why Inflation and Stock Market Crashes Matter
Retirees should be cautious about assuming their investments will consistently deliver returns above inflation. Pattabiraman recommends using a post-tax real return assumption of zero or even a negative 1% to 2% when preparing a more conservative retirement plan.
Real returns measure investment performance after accounting for inflation. For example, if inflation averages 6%, a zero real-return assumption means the portfolio’s post-tax returns merely keep pace with rising living costs.
Another important factor is sequence-of-returns risk. This occurs when poor market performance coincides with withdrawals, particularly during the early years of retirement.
If equity markets fall sharply while a retiree needs money for everyday expenses, they may have to sell shares or mutual fund units at lower prices. Even if markets recover later, withdrawing money during the downturn can leave less capital available to participate in that recovery.
This is why Pattabiraman’s approach emphasises controlling equity exposure and planning withdrawals carefully instead of relying on consistently high market returns.
Can a 15-Year Income Buffer Protect Retirement Savings?
Pattabiraman’s third principle focuses on building sufficient fixed-income resources to cover inflation-adjusted expenses during the first 15 years of retirement.
Where financially feasible, this approach can support a bucket strategy, in which money for regular expenses is separated from investments intended for longer-term growth.
By maintaining a dedicated source of income for near-term needs, retirees may be able to leave their equity investments untouched during market downturns rather than selling them to meet expenses. A 20% to 30% equity allocation could potentially remain invested for several years under such an arrangement, depending on the individual’s circumstances.
Pattabiraman also suggests considering pension plans or multiple annuity income streams alongside a bucket strategy to strengthen retirement income security.
However, retirees should account for inflation when planning these income sources. Fixed-income investments and annuities do not necessarily provide payments that increase in line with living costs.
What Should Investors Consider Before Retirement?
The central lesson from Pattabiraman’s analysis is that retirement planning should prioritise the sustainability of withdrawals rather than simply maximising investment returns.
Before deciding how much to allocate to stocks and equity mutual funds, investors should assess the size of their retirement corpus, expected expenses, available fixed-income resources and ability to tolerate market losses.
The right allocation will differ from one retiree to another. A larger financial cushion may allow greater flexibility, while someone with limited savings relative to their spending needs may need a more cautious approach.
Disclaimer: This article is intended for general informational and educational purposes only and should not be treated as financial or investment advice. The equity allocations and retirement scenarios cited are illustrative and may not be suitable for every investor. Actual retirement needs depend on factors such as inflation, investment returns, taxes, life expectancy and personal expenses. Consult a qualified financial adviser before making investment or retirement-planning decisions.