1. A safe withdrawal rate is the amount of money that you can withdraw from your investments each year after retirement, with the ability for future year’s withdrawals to increase with inflation, and with a high likelihood that this money will last for the remainder of your life expectancy, even if investments are delivering below average returns.
2. The typical 4% rule recommends that a retiree annually spend a fixed, real amount equal to 4% of his initial wealth, and rebalance the remainder of his money in a 60%-40% mix of stocks and bonds (like, say, a Balanced equity fund) throughout a 30-year retirement period.
3. This will give you a greater chance of not running out of your money and it’s valid for 25+ year periods.
4. For an advanced life stage where 25+ years existence starts getting lesser, then the 4% can be adjusted upwards.
5. The way the 4% rule works is that you start by withdrawing 4% out of your portfolio in the first year.
6. The next year you withdraw the same amount as in the first year plus annual inflation.
7. For instance, if you start by withdrawing, say, 4 lakh out of your wealth of 1 crore in the first year when inflation is 7%, then in the second year you withdraw 4 lakh + 7% (i.e. 28,000)= 4,28,000.
8. Every year thereafter, you keep adjusting the previous year’s withdrawal amount by the relevant inflation rate.
9. The 4% rule is only a guideline, so if your equity portfolio performs better than expected, then you can spend more, even up to 6% too.
10. Needless to mention here that in case there is a sustained multi-year bear market, when your portfolio value drops considerably, a cut back on such withdrawals may be required.
11. From my point of view, a young investor should firstly strive to build a retirement corpus of 25 (or even 30) times his estimated annual retirement expenses through long-term SIPs of diversified equity funds during 30-35 years of his earning life.
12. Thereafter, he should endevaour to maintain this corpus in a "safer" Balanced equity fund well before his retirement age, so that he can then apply the 4% withdrawal rule comfortably during the entire 30+ years of his retired life.
13. The basic assumptions in the 4% withdrawal rule are 7% min. CAGR from the retirement corpus and 3% max. inflation rate on a long-term basis.
14. In our context, being a vibrant developing economy, we can safely tweak the assumptions as 12-13% min. CAGR and 5-7% max. inflation rate on a 30-yr long-term basis.
15. For an investor who is able to achieve 25x corpus target at any age, the 4% withdrawal rule starts working fine thereafter too.
2. The typical 4% rule recommends that a retiree annually spend a fixed, real amount equal to 4% of his initial wealth, and rebalance the remainder of his money in a 60%-40% mix of stocks and bonds (like, say, a Balanced equity fund) throughout a 30-year retirement period.
3. This will give you a greater chance of not running out of your money and it’s valid for 25+ year periods.
4. For an advanced life stage where 25+ years existence starts getting lesser, then the 4% can be adjusted upwards.
5. The way the 4% rule works is that you start by withdrawing 4% out of your portfolio in the first year.
6. The next year you withdraw the same amount as in the first year plus annual inflation.
7. For instance, if you start by withdrawing, say, 4 lakh out of your wealth of 1 crore in the first year when inflation is 7%, then in the second year you withdraw 4 lakh + 7% (i.e. 28,000)= 4,28,000.
8. Every year thereafter, you keep adjusting the previous year’s withdrawal amount by the relevant inflation rate.
9. The 4% rule is only a guideline, so if your equity portfolio performs better than expected, then you can spend more, even up to 6% too.
10. Needless to mention here that in case there is a sustained multi-year bear market, when your portfolio value drops considerably, a cut back on such withdrawals may be required.
11. From my point of view, a young investor should firstly strive to build a retirement corpus of 25 (or even 30) times his estimated annual retirement expenses through long-term SIPs of diversified equity funds during 30-35 years of his earning life.
12. Thereafter, he should endevaour to maintain this corpus in a "safer" Balanced equity fund well before his retirement age, so that he can then apply the 4% withdrawal rule comfortably during the entire 30+ years of his retired life.
13. The basic assumptions in the 4% withdrawal rule are 7% min. CAGR from the retirement corpus and 3% max. inflation rate on a long-term basis.
14. In our context, being a vibrant developing economy, we can safely tweak the assumptions as 12-13% min. CAGR and 5-7% max. inflation rate on a 30-yr long-term basis.
15. For an investor who is able to achieve 25x corpus target at any age, the 4% withdrawal rule starts working fine thereafter too.