What is the 4% withdrawal rule in retirement planning?

Don’t you plan really hard in accumulating the much-desired retirement corpus, considering your annual expenses, inflation and taxes? And a small mistake in withdrawal strategy can silently destroy decades of hard-earned savings. Here is where the 4% withdrawal rule comes into play and needs your understanding:

The rule has been designed such that the retirement corpus sustains through your lifetime. Herein, the method suggests that from the very first year after your retirement, you can withdraw 4% of the corpus in the year and continue to do so every year, adjusting for inflation, aiming that the corpus lasts for 30 plus years. This is considering the higher life expectancy rate currently.

In the words of Kirang Gandhi, a Pune-based personal finance expert, “the 4% thumb rule in retirement planning means you can withdraw 4% of your retirement corpus every year while trying to make your money last for nearly 25–30 years.”

For example, if your annual expenses are ₹12 lakh, you may need around ₹3 crore as a retirement corpus.

The rule developed by William Bengen came into existence in 1994 and considers a balanced portfolio mix (50-75% equities and the rest bonds) that will pass even crashes. For meeting the 4% withdrawal rule, you will need the annually needed amount*25.

For reaping the maximum benefit of the rule and ensuring your retirement corpus sustains through your lifetime, you need to construct your portfolio with proper asset allocation.

Herein, based on your investor profile, you can construct the portfolio to achieve the desired success (i.e. sustenance of retirement corpus for 30 years). Conservative investors can go with 50% allocation in equities and 50% in debt, offering the highest safety with the lowest risk. Investors seeking balanced growth can keep their portfolio as 60:40, with 60% in equities and the rest in debt, offering a good safety and success rate.

However, aggressive investors can keep a 75/25 allocation in equity and debt for high upside growth with a higher risk.

In conclusion, plan your retirement corpus and withdrawals in your sunset years smartly. After all, retirement is not just about accumulating wealth, but also about making money last longer than you.