What is 4 per cent rule of withdrawal from corpus after retirement? Explainer

Accumulating sufficient funds for your post-retirement life is one of the key financial goals for most investors. Aside from saving adequate funds to be able to buy a house, a car, and send children for higher education, retirement planning is an important goal that carries a lot of significance.

Some investors try to achieve this prematurely by pursuing FIRE (Financial Independence Retire Early), whereas others go slow while they build a corpus for their golden age.

However, once the corpus is created, investors must stick to financial discipline to ensure that withdrawals are not too high. Wealth advisors and conventional wisdom suggest that there should not be more than 4% withdrawal from the retirement corpus in a year.

Let us explain what the 4% withdrawal rule is.

Withdrawal rule

Developed in 1994 by William Bengen, the rule says that 4% is the highest safe initial withdrawal rate that can face the worst-case market scenarios over three decades.

How to implement it?

1. First year withdrawal: As per 4% withdrawal rate, you can withdraw a maximum of 4% of the corpus. For instance, if your corpus is ₹3 crore, 4% withdrawal means you could withdraw ₹12 lakh in the first year.

2. Inflation: From the second year onwards, retirees could add inflation to maintain the same standard of living as the previous year. For instance, if there is 5% inflation, then one could withdraw ₹12.60 lakh in the second year.

3. Equity-debt ratio: It is assumed that a chunk of the corpus is invested into securities, and the remaining funds are invested in a mix of safe assets: fixed deposits, debt instruments, and savings accounts.

Shortcomings

This 4% rule is not infallible since it does not consider other factors, such as personal or medical emergencies and post-retirement life beyond 30 years. Some experts recommend that the maximum annual withdrawal should be lower than 4%.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.

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