Many on the verge of retirement ask us, “how much equity should I hold after retirement?” This is a tough question to answer as it depends on the individual, but some general guidelines are possible.
Asking this question on the verge of retirement with no prior market experience can be harmful. It is essential to ask this question years before we actually retire so that we can plan appropriately.
We all appreciate the importance of equity when accumulating a corpus. The usual equity allocation recommended is 50-70%. We depend on equity to beat inflation in the accumulation phase.
Beating inflation is essential in the withdrawal phase (post-retirement) also. However, the equity allocation depends on the amount of corpus at hand. One of the most difficult financial problems is determining if a given corpus is sufficient to try and beat inflation in retirement.
Extreme cases – too little or too much corpus – is not a problem. Ten years ago, most middle-class retirees would have ended up on the too little side due to a lack of capital market exposure. Today they would have “some” experience with equity/debt mutual funds and have a corpus neither too small nor too big. Deciding the asset allocation for such retires is a tough problem.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Our recommendations are based on two basic principles: (1) Be conservative and err on the side of caution; (2) Appreciate the notion of the sequence of returns risk. Any stretch of poor equity returns at the start of retirement can deplete the corpus fast.
Ideally, our reliance on equity after retirement should be as low as possible.
Thumb rule 1: An equity allocation of not more than 30% for typical retirements is recommended.
Anything higher than this is acceptable only if the corpus is quite large.
For example, a retiree with a 30X corpus should not venture too much into equity. Here X = annual expenses in the first year of retirement. Whereas a retiree with, say, 75X corpus can afford some more quality.
The freefincal robo advisory tool is built with these ideas. The typical equity allocation recommended for different retirement ages (assuming the person is currently 26) is tabulated below.
| Retirement | Equity allocation |
| 60 | 20% |
| 55 | 22% |
| 50 | 30% |
| 45 | 32% |
| 40 | 34% |
| 35 | 36% |
| 30 | 37% |
| 27 | 38% |
Even if the 26-year-old retires by 27 (naturally an unlikely event), the suggested equity allocation is only 38%. This is because an entire lifetime is spent in (early) retirement. This would mean seeing crashes, recessions and political turmoil. The corpus will deplete even faster if we withdraw from equity during these periods.
Many reply to this assertion that “they will live frugally and not touch equity when it is down”. If only we could be sure of how our life will be in future, how much we will spend etc.!
Thumb rule 2: Never assume a real return (after tax) during retirement!
This is related to thumb rule 1 and not independent, but it is better to spell it out. Zero real return or post-tax portfolio return = inflation rate is the highest real return one should assume. Ideally, I would prefer a minus 1% or even a minus 2% real return!
A bucket strategy and minimal equity dependence will automatically satisfy this. For examples, see:
- Retirement plan review: Am I on track to retire by 50?
- I am 30 and wish to retire by 50; how should I plan my investments?
- How much do I need to retire by 45 in India?
Thumb rule 3: Can you generate inflation-protected income from fixed-income assets for the first 15 years of retirement? If yes, you can comfortably work with a bucket strategy. If not, your expectations have to be significantly more conservative.
A 15-year time window offers time to handle poor sequences of returns in equity. During this time, the 20-30% equity (typically) can grow largely untouched in other buckets (see above examples) for future use.
Finally, as an added safety measure, retirees can consider income flooring options by including a pension plan. See: How to beat inflation after retirement along with guaranteed pension.
The ultimate “safe” retirement strategy is to combine multiple pension plans (annuities) and a bucket strategy. This is explained here: Use this annuity ladder calculator to plan for retirement with multiple pension streams.
In summary, we have discussed some thumb rules for deciding equity allocation after retirement. Ideally, this should be considered right at the start of the retirement planning journey. If done on the verge of retirement, the answers (assuming they have no conflict of interest) are almost always disappointing.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)