Saturday, October 28, 2023
HomeMutual FundWhat should be my safe withdrawal rate for retirement?

What should be my safe withdrawal rate for retirement?


A reader asks, “How can I calculate my safe withdrawal rate when I retire 25 years from now? I am 30”.

What does the term “safe withdrawal rate” mean? The safe withdrawal rate, or SWR, refers to the amount of money that can be withdrawn annually from a retirement fund in the first year of retirement. This rate is calculated by dividing the initial withdrawal amount by the total money available for retirement. Typically, backtesting is employed to determine a suitable SWR. By analyzing data from both equity and debt markets, we can establish the withdrawal rate that allows the retirement fund to last longer than the individual’s lifespan in most cases. It’s important to note that the SWR only represents the withdrawal rate in the first year of retirement, and subsequent years may naturally involve higher rates.

Based on US market history, backtests initially determined the SWR to be about 4%, although recent market data have indicated its limitations; for some history and why we need to look for alternatives, see: Why we need to stop using Safe Withdrawal Rate (4% rule) for retirement planning.

There is little point in backtesting using Indian market data because the history is too short. In any case, our retirement plan should reduce the sequence of returns risk with a combination of retirement buckets and annuities. This is so much easier to do when retirement is far away, as in your case.

The only use for an SWR is to determine if a retiree has enough corpus to distribute them into buckets to try and beat inflation or if she should buy an annuity and not take on market risk. For example, if the SWR (annual expenses in the first year of retirement divided by available corpus) turns out to be 6%, then an annuity is safest.

Even though the income cannot match up to inflation with an annuity, there will be some income for the retiree’s lifetime. If, on the other hand, we hand taken on market risk with the corpus, it may get depleted before she passes.

But this is easy to deduce for high SWRs. What about 5% or even 4% (since widespread agreement exists that even this is high)? This is why our robo-advisory tool never bothers with the SWR.

We implement the income bucket approach to mitigate the negative impact of poor investment performance during the initial retirement years. This approach ensures a reliable income for the first 15 years of retirement, adjusted for inflation. Meanwhile, the remaining funds and an emergency fund are divided into separate low-risk, medium-risk, and high-risk buckets. This strategy reduces the need for constant adjustments and uncertainties in managing these buckets.

Detailed illustrations are available here:

In addition, two further options are available.

So our aim should not be to focus on some fixed SWR. It should be to ask, “How best am I prepared for poor returns from equity and fixed income after retirement?”

For what it is worth, we mention the withdrawal rates for the above scenarios using the freefincal robo advisory tool.

Assumptions and inputs

  • Age 30; Age of spouse: 28
  • Current monthly expenses that will persist in retirement: Rs 50,000
  • Retirement age: 55
  • Years to retirement 25
  • Total average monthly expenses (annual/12) 50,000
  • Percentage by which your monthly investments can increase each year (until you have accumulated enough for retirement) 10%
  • Post-tax return expected from equity investments 10%
  • Post-tax return expected from current taxable fixed income 5%
  • Rate of return expected from current tax-free fixed income 6%
  • Inflation before retirement 7%
  • The assumed life expectancy of the younger spouse: 90
  • Inflation during retirement 6%
  • Monthly expenses in the first year of retirement Rs. 2,71,372
  • Years in retirement (until younger spouse reaches age 90) 37
  • Corpus already accumulated is assumed to be zero for convenience.

Result 1: Corpus required with no income flooring or laddered annuity: Rs. 9.82 Crores. Withdrawal rate: 3.31% (withdrawal rate here only refers to the value for the first year in retirement).

Result 2: Corpus required with 100% income flooring (single monthly annuity = monthly expenses in the first year of retirement): Rs. 13.08 Crores. Withdrawal rate: 2.49%

Result 3: Corpus required with 100% income flooring (single monthly annuity = monthly expenses in the first year of retirement): Rs. 25.40 Crores. Withdrawal rate: 1.28%

This is an example. The steps can be altered as desired via the inputs in the robo tool.

Annuity ladder along with expenses after retirement. A screenshot from the freefincal robo advisory tool

Most people reading this would say this is an unachievable corpus. Yes, that is how it would seem when you get started.  As your corpus grows, so will your confidence to build stronger moats for your retirement castle. So aim for result one, and then as the years pass, you can modify your retirement plan.

In summary, please do not fixate on any particular SWR. Focus on investing as much as possible for retirement and plan to combat returns risk sequences first in the initial years of retirement and later beyond. As your wealth grows, so will your perspective.

Do share this article with your friends using the buttons below.


🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!


Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!


New Tool! => Track your mutual funds and stock investments with this Google Sheet!


Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp

Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth! 

Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let’s Get Rich with Pattu Podcast

You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.

Lets Get RICH With PATTU podcast on YouTube
Let’s Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!


Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.


Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.


Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   


Our new book for kids: “Chinchu gets a superpower!” is now available!

Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.

Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!

Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!

Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.

Buy the book: Chinchu gets a superpower for your child!


How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!


Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!


We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.


About freefincal & it’s content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)


Connect with us on social media


Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.


Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.


Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)


 



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments