The 4% annual withdrawal rule was coined by American financial planner William Bengen. He stated that if a retired person withdraws 4% of their retirement funds annually and increases the withdrawal amount each year to account for inflation, their retirement fund could last for 30 years.
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The thought of retiring before your scheduled time sounds appealing. No office work stress, no phone calls, and you can spend your time as you please. The question is, what’s the formula for retiring before your scheduled time? One formula that’s often talked about is saving 25 times your annual expenses after retirement and achieving complete financial freedom. The question is, is this formula really effective?
The idea of FIRE doesn’t work much in India.
First, it’s important to understand that the idea of ”Financial Independence, Retire Early,” or FIRE, originated in the United States. However, this formula doesn’t work well in India. We can illustrate this with an example. Suppose Ramesh’s annual expenses after retirement are ₹1.2 million. Multiplying this by 25 results in ₹3 crore. This calculation is based on a 4% withdrawal rule. This means that withdrawing 4% annually will ensure your funds last longer.
4% annual withdrawal rule
The 4% annual withdrawal rule was coined by American financial planner William Bengen. He stated that if a retired person withdraws 4% of their retirement funds annually and increases the withdrawal amount each year to account for inflation, their retirement fund could last for 30 years.
Inflation in India is higher than in America
This formula underestimates inflation. It assumes stable returns after retirement. The post-retirement period is assumed to be 30 years. Therefore, this formula does not work in India. The 4% inflation estimate was based on the United States. Inflation in the United States has historically been between 2 and 3%.
Lifestyle, housing and healthcare inflation is very high
Inflation in India typically ranges between 5-6 percent. Lifestyle, healthcare, and housing inflation rates are even higher. “The FIRE framework, which calls for 25 times annual savings, doesn’t work in India,” said Vinit Rathi, CEO of Avisa Wealth Creators. “This is because lifestyle, housing, and healthcare inflation in India can reach 6-9 percent annually, leading to a retirement fund being depleted earlier than expected.”
The money runs out after 29 years of retirement
In the first year, Ramesh withdraws ₹12 lakh. This represents 4% of his ₹3 crore retirement fund. In the second year and beyond, the withdrawal amount increases by 6% annually. The return on the retirement fund is slightly higher than inflation. Even assuming an annual investment return of 7%, Ramesh’s retirement fund gradually dwindles. This leads to the fund being depleted by the time Ramesh reaches age 79. This means the money lasts for 29 years after retirement.
The question is, what’s the solution? Experts say that early retirement isn’t impossible. However, calculations will need to be made keeping India in mind.
Option 1: Treat early retirement as semi-retirement
You can use the 4% framework, but you don’t have to rely solely on the portfolio.
-Continue working part time
Create flexible sources of income
Reduce withdrawals in years with weak market returns
Even a small annual income can sustain your portfolio for a long time.
Option 2: Build a large fund
If you don’t want to be completely dependent on work income, build a larger fund. Pune-based financial mentor Kirang Gandhi said, “The 4% rule assumes low inflation, social security support, and a shorter retirement fund. Inflation in India is around 5-6%. Healthcare costs are incurred out of pocket. Furthermore, people tend to live longer after retirement. This makes the 4% withdrawal rule seem risky.”
He said that in India, early retirement requires a larger corpus. Instead of 25 times, your target should be 35 to 40 times your annual expenses. This will ensure you don’t run out of money and allow you to enjoy a good lifestyle even after retirement.
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