1. This achievement is due to 2 thumb rules applying on your accumulated retirement corpus simultaneously:-
a) Power of compounding, and
b) 4% annual withdrawal rate.
2. Due to the first rule, your retirement corpus in, say, a balanced fund would continue to remain invested and earn a CAGR during your retirement years.
3. Hence, crux of "perpetual" withdrawal now rests on second rule, viz. 4% annual withdrawal.
4. The way the 4% rule works is that you start by withdrawing 4% out of your fund in the first year.
5. The next year you withdraw the same amount as in the first year plus annual inflation.
6. For example, from a 45 lakh corpus, if you start by withdrawing 1.8 lakh (i.e.4% of 45 lakh) in 1st year when inflation is 6%, then in 2nd year you can withdraw 1.8 lakh + 6% (i.e. 11,000)= 1.91 lakh, i.e. 15,920 per month.
7. Every year thereafter, you can keep adjusting previous year’s withdrawal by relevant inflation rate in a similar manner.
8. As 4% rule is a guideline, you can annually withdraw more if your equity fund performs better than expected (even 5%, i.e.18,000 per month).
9. Hence, you can continue to "perpetually" withdraw from your balanced fund in this manner, as it's growing at higher CAGR than withdrawal rate.
10. Needless to mention here that in case there is a sustained multi-year bear market, when fund value drops considerably, a cut back on withdrawals may be required in those years.
11. 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 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 4% withdrawal rule comfortably during his entire retired life.
13. Basic assumptions in 4% withdrawal rule are:-
a) 7% min.CAGR from the fund,
b) 3% max. long-term inflation.
14. In Indian context, being a vibrant developing economy, we can safely tweak assumptions as:-
a) 10-11% min.CAGR, and
b) 5-7% max. 30-yr inflation rate.
15. For any investor who is able to achieve 25x corpus target at any age, 4% withdrawal rule can be applied thereafter too.
16. While investors can select own fund (or portfolio) during investing years as per their risk profile, it is preferable to start 4% (or more) withdrawal after retirement in Hybrid Aggressive fund, due to its auto-rebalancing mandate, hence best suited to enable withdrawals, fight inflation and leave behind a legacy too.
a) Power of compounding, and
b) 4% annual withdrawal rate.
2. Due to the first rule, your retirement corpus in, say, a balanced fund would continue to remain invested and earn a CAGR during your retirement years.
3. Hence, crux of "perpetual" withdrawal now rests on second rule, viz. 4% annual withdrawal.
4. The way the 4% rule works is that you start by withdrawing 4% out of your fund in the first year.
5. The next year you withdraw the same amount as in the first year plus annual inflation.
6. For example, from a 45 lakh corpus, if you start by withdrawing 1.8 lakh (i.e.4% of 45 lakh) in 1st year when inflation is 6%, then in 2nd year you can withdraw 1.8 lakh + 6% (i.e. 11,000)= 1.91 lakh, i.e. 15,920 per month.
7. Every year thereafter, you can keep adjusting previous year’s withdrawal by relevant inflation rate in a similar manner.
8. As 4% rule is a guideline, you can annually withdraw more if your equity fund performs better than expected (even 5%, i.e.18,000 per month).
9. Hence, you can continue to "perpetually" withdraw from your balanced fund in this manner, as it's growing at higher CAGR than withdrawal rate.
10. Needless to mention here that in case there is a sustained multi-year bear market, when fund value drops considerably, a cut back on withdrawals may be required in those years.
11. 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 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 4% withdrawal rule comfortably during his entire retired life.
13. Basic assumptions in 4% withdrawal rule are:-
a) 7% min.CAGR from the fund,
b) 3% max. long-term inflation.
14. In Indian context, being a vibrant developing economy, we can safely tweak assumptions as:-
a) 10-11% min.CAGR, and
b) 5-7% max. 30-yr inflation rate.
15. For any investor who is able to achieve 25x corpus target at any age, 4% withdrawal rule can be applied thereafter too.
16. While investors can select own fund (or portfolio) during investing years as per their risk profile, it is preferable to start 4% (or more) withdrawal after retirement in Hybrid Aggressive fund, due to its auto-rebalancing mandate, hence best suited to enable withdrawals, fight inflation and leave behind a legacy too.