An easy-to-browse ready reckoner for everyone, with lots of easy tips
VIABILITY OF 4% SAFE WITHDRAWAL RULE
1. After an investor accumulates 25 times his estimated annual retirement expenses, and invests it in a Balanced fund, the power of compounding enables smooth 4% annual withdrawal (even up to 7% by increasing or decreasing it according to the inflation) during the 30-year retirement period easily.
2. The original basic assumptions of this safe withdrawal rule are 7% min. CAGR from the retirement corpus and 3% max. inflation rate on a long-term basis.
3. In the Indian 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.
4. This withdrawal process works only when investment is done in "Growth Option" mode (or even Dividend Reinvestment Option popular earlier), where earnings accumulate and multiply over time through the power of compounding, along with the original corpus at the same CAGR, hence lesser units are redeemed for retirement expenses.
5. In the case of "Dividend Option", the earnings have already been paid out to the investor, in the form of dividends, hence they don't accumulate and compound over time along with the original corpus, hence more units are to be redeemed for same expenses.
6. Such an investor could, therefore, reinvest the dividend immediately in another fund with Growth Option, for obtaining compounding advantage.
2. The original basic assumptions of this safe withdrawal rule are 7% min. CAGR from the retirement corpus and 3% max. inflation rate on a long-term basis.
3. In the Indian 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.
4. This withdrawal process works only when investment is done in "Growth Option" mode (or even Dividend Reinvestment Option popular earlier), where earnings accumulate and multiply over time through the power of compounding, along with the original corpus at the same CAGR, hence lesser units are redeemed for retirement expenses.
5. In the case of "Dividend Option", the earnings have already been paid out to the investor, in the form of dividends, hence they don't accumulate and compound over time along with the original corpus, hence more units are to be redeemed for same expenses.
6. Such an investor could, therefore, reinvest the dividend immediately in another fund with Growth Option, for obtaining compounding advantage.