Market crash near or after retirement: Invested heavily in equities for high returns, but are you ready to withstand a 25% crash?

A sharp stock-market fall can be unsettling at any stage of investing. But for a person close to retirement or a retiree who is withdrawing money from the portfolio every month, the impact can be much bigger.

This is where planning and preparation matter. The equity-debt mix of a retirement portfolio becomes important. Having enough money in relatively stable assets like debt can give your equity investments enough time to recover from a correction or a crash instead of forcing you to sell them at lower prices.

So, how much should retirees keep in debt, how should they fund withdrawals during a market correction, and what should they do in the years immediately before and after retirement?

Why a market crash can hurt more after retirement

A 25% fall in equity markets does not have the same impact on someone who is still earning and investing as it does on someone who has just retired or may retire soon.

A working investor may have regular income to meet expenses and can continue investing through the downturn. A retiree, on the other hand, may need to sell investments to fund monthly expenses.

The five years around retirement deserve particular attention because of sequence-of-returns risk, says Akshat Garg, Head of Research & Product, Choice Wealth.

“The fundamental idea is simple: don’t make your lifestyle dependent on what the equity market does this year,” Garg says.

This is why retirement planning should not focus only on how much return the portfolio can generate but it also needs to consider when the money will be required, where those withdrawals will come from, and will it lead to significant erosion of the retirement corpus.

How much should retirees keep in equity and debt?

There is no single equity-debt ratio that works for every retiree. It depends on age, expenses, other sources of income, corpus size, risk appetite and how long the money needs to last.

Larger debt investment may not provide enough return and hence it may not last long enough to support your retirement till the end. However, having too much in equities can lead to irreversible reduction of retirement corpus during a correction or a crash.

Swati Jain, CEO Wealth, Arihant Capital Markets, says an 80:20 equity-debt allocation may be too aggressive for most retirees, and suggests 60:40 equity-debt as a starting point, depending on the retiree's circumstances.

“A larger debt allocation provides more flexibility to meet near-term expenses without selling equity after a sharp fall,” Jain says.Narinder Wadhwa, MD & CEO, SKI Capital Services, also favours reducing excessive equity exposure around retirement, while cautioning against completely exiting equities because retirement can last 20–30 years.

The key is therefore not to eliminate equity from a retirement portfolio. Equities can remain important for long-term growth and for helping the corpus keep pace with inflation.

Instead, the portfolio needs enough relatively stable assets to meet near-term spending needs.

How a 2–3 year retirement runway can reduce market risk

One practical way to manage this risk is to keep money required for the next few years outside equity.

Retirees keep around two to three years of essential expenses in the debt portion rather than depending on equity for near-term withdrawals, suggests Jain.

For example, if your essential monthly expenses are ₹50,000, two years of expenses would be ₹12 lakh, while three years would be ₹18 lakh.

This money could be held in relatively liquid debt options such as liquid funds, ultra-short-term funds or short-term FDs, depending on the investor's requirements and risk profile, she adds.

This retirement buffer should also be separate from an emergency fund. Jain suggests keeping another six to 12 months of expenses for emergencies such as unexpected medical costs.

The idea is to have enough money in relatively stable assets so that a market crash does not immediately turn into a cash-flow crisis.

What happens to your SWP during a market crash?

Suppose a retiree has a ₹1 crore portfolio and needs ₹50,000 every month through a systematic withdrawal plan, or SWP.

A market correction does not necessarily mean the SWP has to stop.

The more important question is: which part of the portfolio is funding the withdrawal?

Jain says that with a 60:40 equity-debt allocation, withdrawals during a sharp market correction can be funded from the debt portion, allowing the equity allocation to remain invested and recover.

For example, if equity markets fall sharply, the retiree could continue meeting essential expenses from the debt bucket instead of selling equity at depressed prices.

However, this does not mean the same withdrawal can continue indefinitely regardless of market conditions.

“If the correction lasts for long then blindly maintaining the same withdrawal can put additional pressure on the portfolio,” Jain says.

This is where spending flexibility becomes important.

Should you follow a fixed withdrawal rate?

There is no universal withdrawal rate that can guarantee that a retirement corpus will last.

Garg suggests 3–4% of the initial corpus a year as a broad starting point for a well-diversified retirement portfolio, but says the appropriate rate depends on factors such as age, life expectancy, spending pattern, inflation and asset allocation.

For example, someone with a ₹1 crore corpus withdrawing 3% would initially withdraw ₹3 lakh a year, or ₹25,000 a month.

At a 4% withdrawal rate, the initial annual withdrawal would be ₹4 lakh, or about ₹33,333 a month.

These are only illustrations. A retiree's actual sustainable withdrawal rate can be different depending on how long the corpus needs to last, the portfolio's asset allocation, market returns and changes in spending.

Garg also recommends a more flexible approach rather than blindly increasing withdrawals with inflation every year.

After a prolonged period of weak markets, discretionary spending can be reduced temporarily. After exceptionally strong market performance, the retiree may have more room for discretionary spending.

“In retirement, flexibility is itself an asset,” Garg says.

What should you do after a market crash?

The natural reaction after a sharp market fall may be to sell equity because it feels riskier.

But Garg says asset allocation should be decided before a crisis rather than during one.

Suppose you have decided on a 50:50 equity-debt allocation. After a market correction, equity falls and your portfolio becomes 40:60.

Instead of automatically selling debt, the portfolio can be gradually rebalanced towards the original allocation if the long-term investment strategy has not changed.

This does not necessarily mean moving a large amount of debt into equity immediately after a crash. Rebalancing can happen gradually through future cash flows, interest income, maturing fixed-income investments and staggered deployment, Garg says.

Wadhwa also recommends rule-based rather than emotion-driven rebalancing.

The key question after a market crash, Garg says, should not be whether the market will fall further — something that cannot be known consistently.

Instead, ask: Has my long-term asset-allocation strategy changed?

If the answer is no, the portfolio can be brought back towards its target allocation in a disciplined manner.

The biggest retirement risk is not necessarily a market crash by itself. It is being forced to sell a long-term growth asset at the wrong time because the portfolio was not designed around the retiree's cash-flow needs.

That is ultimately what the equity-debt mix should achieve: not predicting the next crash, but ensuring that your lifestyle does not depend on getting the market timing right.