I recently watched a video where someone was explaining a retirement plan. The example was a 60-year-old with a comfortable corpus. The advice was to start an SWP of ₹1.4 lakh a month from an equity fund. Since he does not need that much for his expenses, the remaining amount goes into a SIP in small- and mid cap funds for capital growth.
I was shocked. The one thing that decides whether a retirement plan survives was missing from the whole explanation. It is called sequence of returns risk.
About the author: Hariharan is a SEBI-registered investment adviser and a member of Fee-only India, a group of fixed-fee-only SEBI-registered advisors. He can be contacted via his website hariharanwealthadvisory
Let me explain sequence risk with a simple example. Take a corpus of ₹3 crore. Assume the market gives these returns over five years: -25%, -10%, +10%, +20% and +30%. This is only an illustration, not a forecast. Together they work out to about 3% a year.
If you only invest and never withdraw, the order does not matter. ₹3 crore becomes about ₹3.47 crore in any order.
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Now take out ₹1.4 lakh a month, which is ₹16.8 lakh a year. For simplicity, I have taken the whole year’s amount at the start of each year. A real SWP runs monthly, which would make the gap a little wider. The returns are the same. Only the order changes.
Bad years first: ₹2.25 crore at the end of year 5
Good years first: ₹2.77 crore at the end of year 5
Same returns, same withdrawals, and a difference of ₹51 lakh. That is 17% of the starting corpus, created only by timing.
Why does this happen? When the market falls, you have to sell more units for the same income. If the NAV is 100, ₹16.8 lakh needs 16,800 units. If the NAV has dropped to 70, you need 24,000 units. Those extra units are gone, and they cannot take part in the recovery.
Look at the withdrawal rate too. In the bad case, the portfolio at the start of year 3 is ₹1.76 crore. The same ₹16.8 lakh is now 9.5% of it, up from 5.6% at the beginning. That is not a safe rate for someone who may need the money till 90.
Someone will say he spends only ₹80,000 a month and the rest is reinvested, so the real withdrawal is smaller. That is fair. At ₹9.6 lakh a year, which is 3.2% of the corpus, the same test gives ₹2.78 crore against ₹3.07 crore. The gap shrinks to about ₹29 lakh, but it does not disappear.
Now think about the money he does not need. It is taken out of one equity fund through the SWP and put back into small and mid cap funds through a SIP. It leaves the portfolio and comes back into it. As a Tamil comedy line goes, “idhuku pesama paruthi moota godown laye irukalame” — why not just leave the cotton sack in the godown? On top of that, there is capital gains tax on the redemption and maybe an exit load on recent units. If he does not need the money, leave it invested. If he wants more small caps, that is a risk decision to take with open eyes, because small and mid cap funds fall much harder than large caps in a bad market. At 60, with no salary to fall back on, that is the wrong place to add risk.
What would I do instead?
Keep 5 to 8 years of expenses separate, in debt funds or cash. At ₹80,000 a month, that is ₹48 lakh to ₹77 lakh. This is your buffer. When equity falls, spend from it and give the equity time to recover. The longer the buffer, the longer a bad phase you can wait out.
The remaining money can then be deployed strategically, depending on the person’s risk profile, goals and other sources of income. Someone with a pension and a high capacity for risk can hold more equity. Someone who loses sleep when the portfolio falls should hold less. There is no single answer, which is why a retirement plan has to be made for the person.
Cover the essential expenses with income that does not depend on the market, like EPF, SCSS or an NPS annuity. That reduces how much the buffer and the SWP have to carry.
Bring down the equity share as retirement comes closer, and rebalance on a fixed schedule.
If you are 35 or above, retirement may feel far away. But the decisions that protect you from this risk are made years before the first withdrawal: how much equity you hold at 55, and how much safe money you keep aside. A plan built early is simple. A plan fixed after the market has already fallen 25% is much harder.