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Retirement planning is a journey, and like any journey, it’s not just about the destination, but also about how you get there. One of the most critical questions we face when planning for retirement is – how much can we safely withdraw from our retirement corpus without risking its premature depletion? This is where the concept of Safe Withdrawal Rates (SWRs) comes into play.
The 4% rule, a benchmark in retirement planning, particularly in the United States, has been widely accepted. However, over the weekend I read a whitepaper “Balancing Acts: Sale Withdrawal Rates in the Indian Context: by Rajan Raju and Ravi Sarogi published in January 2024. It provides a detailed analysis of what could be “robust” SWR in India across different portfolio mix and length of retirement.
When they transposed this rule to the Indian context, the 4% rule doesn’t quite fit the bill. The unique Indian market realities and economic conditions call for a more customised approach. Their studies suggest a more conservative withdrawal rate, between 3.0% and 3.5%, as a safer benchmark for sustainable retirement planning in India.
While a portfolio with higher equity allocations can potentially increase SWRs, they also significantly increase the risk of portfolio failure, particularly for withdrawal rates greater than 3.75%. On the other hand, conservative portfolios, based on fixed deposits, are vulnerable to the combined impact of high inflation and taxation, which erodes their real returns, hastening depletion.
So, what’s the way forward? As per the paper a balanced and diversified portfolio strategy, combining equities with more stable assets such as fixed deposits and gold, will likely maintain the balance between risk and return.
Remember, retirement planning is not a one-size-fits-all approach. It’s a dynamic process that requires regular reassessment and adjustments to align with evolving personal needs and external economic changes.
In conclusion, understanding and applying the concept of SWRs is a crucial step in ensuring a secure and comfortable retirement. It’s about finding that sweet spot between preserving your hard-earned nest egg and ensuring a comfortable lifestyle. So, embrace the power of informed decision-making and secure your golden years with confidence.
Would love to hear your thoughts and experiences. Have you considered SWRs in your retirement planning?
PS: The paper does document its limitations in analysis due to limited data availability (2 decades of data) and not accounting for any transaction costs, fees, or taxation due to rebalancing of portfolio.
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