A reader says, “I have a generic question about retirement planning. Can you retire if your annual expenses equal 6% of your corpus? Say my monthly expenses are 1 lac. My corpus is two crores. I do SWP for 1 lac monthly. If the returns exceed 6% pa, it will also cover inflation. Is there anything missing in this assumption?”
The catch lies in “If the returns exceed 6% pa”. What would you do if you do not get that 6% return (after tax) for a few years? Spend less? What if you can’t spend less? What if you had to spend more?
You will be forced to withdraw from your corpus at a rate higher than at which it is growing. Eventually, you will run out of money soon. Even if we assume no new retirement expenses arise, the corpus will only last 16 years! In the 17th year, the annual expense would be 33% higher than the corpus!
Even for retirement at age 60, having a corpus worth only 16 years (if expenses do not increase, returns do not fluctuate etc.) is a huge risk.
The situation presented by the reader corresponds to a withdrawal rate of 6% (12 lakhs divided by two crores). This is way too high to retire comfortably. Different scenarios have been presented: I plan to retire in 25 years; what should be my safe withdrawal rate? The withdrawal rate should be significantly below 4% to even think of retirement!
If the withdrawal is high – even 4% is high today! See Why we need to stop using Safe Withdrawal Rate (4% rule) for retirement planning – then even a small amount of equity (say, 20%) can increase risk significantly. A poor string of returns would deplete the corpus fast.
At 6% or even 5%, most capital market-linked products like debt funds are risky. The only solution is to buy pension products, small saving schemes or RBI bonds, maintain a small sum for emergencies, find work after retirement and pray … a lot.
Here is a detailed illustration using the freefincal robo advisory tool: My withdrawal rate is 5% – what are my post-retirement investment options?
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About The Author
Dr. 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.
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