Last Updated on May 2, 2023 at 8:17 am
A reader says, “You mention in multiple articles such as – How much equity should I hold after retirement? – An equity allocation of not more than 30% for typical retirements is recommended.”
“Can you write/update an article explaining if/how this 30% number would change based on someone’s current corpus (as a multiple of annual expenses in retirement), or expected corpus at retirement, or any other factor such as how close/ far away from FIRE someone is, etc.? My current corpus is 37X with equity: debt is 45:55. I plan to retire after ten years at age 55.”
“I have started moving my investments from equity to debt monthly, making it 30% equity at my planned retirement age. Is this the right time for me to start reducing equity, or should I continue investing in equity for another five years and reduce it in the last five years before retirement? Does my current corpus change the 30% guidance in my case?”
That 30% equity allocation after retirement is only a guideline/thumbrule. While our robo-advisory tool typically recommends a lower allocation, it can be (and must be) adjusted as per the circumstances of each retiree.
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For example, here is an illustration from the tool.
- Current monthly expenses that will persist in retirement 1,00,000
- Your age at the end of the current year is 45 (we will use the same for spouse here)
- Age you wish to retire 55
- Post-tax return expected from equity investments 10%
- Post-tax return expected from current taxable fixed income 6%
- Rate of return expected from current tax-free fixed income 7%
- The assumed life expectancy of the younger spouse is 90
- Inflation during retirement (%) 6
- Years to retirement 10
- Monthly expenses in the first year of retirement 1,96,715
- Years in retirement (until younger spouse reaches age 90) 35
- Corpus required: Rs. 6,97,56,592
- Overall post-retirement asset allocation recommended: 78% fixed income and 22% equity.
- 54% of the total corpus is assumed to be used in a nearly risk-free income bucket to generate income for the first 15 years of retirement. This is to handle a poor sequence of returns from equity.
- The remaining corpus is assumed to be distributed among low, medium, and high-risk buckets. About 50% of the chorus in these buckets will be in equity.
This is also only a guideline. Depending on the corpus available and the capital market experience of the retiree, the equity allocation can be suitably adjusted.
In the reader’s case, he has done well to accumulate 37X with ten years to go to retirement. The 45% equity exposure is also on the right side. We recommend a proper calculation with a bucket strategy; see, for example – A retirement plan review: Am I on track to retire by 50?
That said, assuming the 30% equity allocation post-retirement is a reasonable target, a gradual reduction in equity allocation from now will offer some protection against rude market shocks between now and retirement and beyond.
There is no need to have a sense of FOMO (fear of missing out) about starting the equity reduction immediately, not five years from now. Safety first! Before that, repeat the retirement planning exercise with our robo tool or a SEBI-registered fee-only advisor from our list.
Ensure that you are investing enough for retirement now and can increase your investments in the coming years to offset the reduction in equity exposure.