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Safe Withdrawal Rate: How long will your money last in retirement?

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Safe Withdrawal Rate: How long will your money last in retirement?


The longer you plan to live on your retirement corpus, the higher is the risk of things going wrong.

Safe Withdrawal Rate: How long will your money last in retirement?
With a lot of discipline and hard work, you spent a decade or two saving up for your early retirement. Now how to be sure if you have saved-up enough or not? Safe Withdrawal Rate answers this particular dilemma: How much can you spend in retirement based on your savings?
Any retirement planning whether early or traditional has two phases: (1) asset accumulation phase followed by (2) post-retirement spending phase. When we started planning for our own early retirement we discovered the FIRE community used a thumb-rule called 25X for accumulation phase and 4 percent safe withdrawal rate (SWR) for post-retirement spending phase. We also started our FIRE journey with these assumptions, but we now understand these rules and their limitations much better and we will share them with you in this post.
In our earlier blog post How much I need to retire early In India, we shared our views on how much to save to retire early and our opinion on the 25X strategy. In this post, we will share our views on the post-retirement spending phase for which the most common thumb rule is the 4 percent safe withdrawal rate.
Challenges with planning the post-retirement spending  
It is a complex exercise to plan for post-retirement spending because of reasons such as inflation, one’s life span, market volatility, unforeseen expenditures. The longer you plan to live on your retirement corpus, the higher is the risk of things going wrong.
This is where Safe Withdrawal Rate (SWR) comes into the picture since it is a conservative estimate of how much you can safely withdraw annually from your nest egg without exhausting it completely before you die. SWR approach balances between you having enough money every year to live comfortably after retirement without depleting your corpus prematurely.
Is there a universally excepted Safe withdrawal rate that one can use?
Most of USA literature swears by 4 percent Safe Withdrawal rate.
Origin of 4 percent Safe Withdrawal Rate 
The 4 percent safe withdrawal rate is not proven to last forever 100 percent of the time. And that is what happened to people who retired in the year 1966, their money just about lasted for 30 years.
"It’s really important to recognise that the word “safe” should be taken with a grain of salt since it’s based upon what’s happened historically. If markets behave differently than they have in the past, what was safe in the past may not be safe in the future"
- William BengenHow 4 percent Safe Withdrawal Rule works 
  • Assume your annual expenses at the time of retirement is Rs 12 lakh and your retirement corpus is 25X = 3 crore (25 times Rs 12 lakhs)
  • As per 4 percent withdrawal rule, in the first year, you will apply 4 percent withdrawal against your retirement corpus of 3 crore. So in your 1st year, withdrawal would be Rs 12 lakh (4 percent of Rs 3 crore)
  • Second year onwards, forget about 4 percent and never look at it again. Instead, take the previous year’s consumer inflation and add it to the previous year’s withdrawal to calculate your annual withdrawal amount.
  • For example: say previous year’s consumer inflation is 8 percent, you then add 8 percent of Rs 12lakhs = Rs 96K to the withdrawal. So, the second year withdrawal would be Rs 12lakhs + Rs 96K= Rs 12.96lakh (Rs 12,96,000)
  • Each year you simply increase the withdrawal according to the inflation rate so that your lifestyle keeps pace with inflation.
  • Applying 4 percent SWR to Indian context
    We ran our own little experiment based on William Bengen’s study. We assumed:
    • 50/50 stock/debt portfolio
    • Person retired in the year 1996 with 25X corpus of 3 crore, based on Rs 12 lakhs annual expense.
    • Withdrawal Rate is 4 percent rule in all scenarios
    • First Scenario: Actual returns for the first 22 years, assumed returns after 22 years (1.5 percent Real Rate Of Return)
      • We used actual numbers for equity+debt returns and inflation in India for the past 22 years from 1996-2017. Since data is not yet available beyond the year 2017, we assumed static returns for simplicity: equity returns at 10 percent, debt return 5 percent, inflation at 6 percent.
      • The reason we have the sed base year 1996 is because the first major revamp of the BSE Sensex happened only in 1996 not to mention various stock trading scams in the early 90s.
      • Under these assumptions, 3 crore lasted for 40 years.
      • Second scenario: Assumption - 2 percent Real rate of return*
        • Under this assumption, 3 crore lasted for 34 years.
        • Third scenario: Assumption - 3 percent Real Rate of Return
          • Under this assumption, 3 crore lasted for 42 years.
          • Fourth scenario: Assumption - 4 percent Real Rate of Return.
            • Under this assumption, 3 crore lasted for 64 years.
            • Conclusion
              • We advise readers to be a bit conservative rather than being overly optimistic while planning the Safe Withdrawal Rate. Also, keep revisiting the assumptions every 5 years as more and more data will be available and you will also be closer to the retirement date.
              • We highly recommend fellow FIRE enthusiasts to plan for active income after early retirement even if it is part-time work just in case the need arises.
              • In our previous blog post 'How much money I need to Retire Early In India' we said that we are targeting 25X as a starting target but will be most comfortable hanging our boots fully when we reach 40X. Regarding Safe withdrawal rate, we will monitor how the next decade plays out, but at the moment we are considering anywhere between  2-3 percent safe withdrawal rate for post retirement withdrawal.
                Sugandha and Naren live in Goa. This article was first published on SavingHabit.com and can be accessed here.
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