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Follow this rule to ensure you don't run out of retirement funds

Discover the Rule of 4% for retirement planning. This strategy allows for a steady withdrawal from your retirement corpus, ensuring financial stability in the golden years of life.

In the twilight of life, financial stability becomes a pressing concern. With the cessation of regular income, managing expenses can be daunting.


Let's consider the case of Anita, 60, who's transitioning from a bustling career to a life of relaxation and leisure - retirement. After decades of diligent saving and planning, she now faces the task of managing her retirement corpus. Though she has always been financially savvy, she seeks the guidance of a financial planner to navigate this new phase.


The advice she receives introduces her to the Rule of 4%. Let's explore how this rule works and why it might be the guiding light Anita needs in this crucial phase.


The Implication of Inflation


When discussing the future, especially retirement, the elephant in the room is always inflation. It's that pesky little demon that erodes your purchasing power over time. Today, ₹1,000 can get you a decent meal for two at a nice restaurant, but fast forward a couple of decades, and you'll probably need a lot more for the same luxury.


If you're 35 now and planning for your retirement at 60, you need to account for the future value of your current expenses. Let's say your current annual expense is ₹10,00,000. With an average inflation rate of 5% over 25 years, you'll need a whopping ₹33,86,355 to cover the same expenses after 25 years. This inflation-adjusted amount is crucial in estimating the retirement corpus you'd need.


The Rule of 4%


Now, you've got your retirement corpus figured out. But here comes the tricky part – how do you withdraw from this corpus without the risk of running dry in your later years? Enter the Rule of 4%.


The rule is simple. In the first year of retirement, you withdraw no more than 4% of your corpus. Then, you adjust the withdrawal amount for inflation each subsequent year and withdraw  4%. This ensures that the bulk of your capital, the remaining 96%, continues to generate returns.


To illustrate, let's consider a corpus of ₹10,00,00,000:


Year 1: 4% of Corpus = ₹40,00,000 (Total Withdrawal)

Year 2: 4% of Corpus + 5% Inflation = ₹42,00,000 (Total Withdrawal)

Year 3: Same as last year + 3% Inflation = ₹43,26,000 (Total Withdrawal)

The key here is to adjust your withdrawal for inflation every year, using the previous year's withdrawal as a benchmark.


A Quick Calculation


A rough estimate shows that withdrawing 4% of your corpus annually, it should last around 25 years. This is generally the timeframe most people aim for when building their retirement corpus.

Although the absolute amount withdrawn may be more than 4% in some years, the remaining corpus should continue to appreciate, balancing out the difference.


The Rule of 4% is a practical guide to pacing your withdrawals from your retirement fund. Many of your expenses related to transport, EMIs will longer be there. This could give you room to adjust your expenses. The way ahead is to plan your life ahead.


Plan and Prosper


Planning for retirement may feel like walking a tightrope. However, you can balance these two concerns with some forethought and the Rule of 4% by your side. On one side is the need to maintain your accustomed lifestyle, and on the other, the fear of outliving your savings.




What is the Rule of 4% in retirement planning?


The Rule of 4% is a guideline for determining the amount one should withdraw from the retirement corpus each year. In the first year of retirement, one should withdraw no more than 4% of the total corpus. For the subsequent years, the withdrawal should be adjusted for inflation.


How does inflation impact retirement planning?


Inflation erodes your purchasing power over time. This means the money you need to cover your expenses will increase. When planning for retirement, it's crucial to account for the future value of your current expenses, considering the average inflation rate.


How long will my retirement corpus last if I follow the Rule of 4%?

A rough estimate suggests that withdrawing 4% of your corpus annually should last around 25 years. This is the average timeframe most people aim for when building their retirement corpus.


Are there any exceptions to the Rule of 4% in retirement planning?


Yes, there are a few exceptions to the Rule of 4%.

Suppose you retire early or have a family history of longevity. In that case, the 4% withdrawal rate may not be sustainable as your retirement years could significantly exceed the typical 25-year span the rule assumes.


Additionally, the rule may not work as effectively in low-interest-rate environments, warranting a more conservative withdrawal rate.


Personal circumstances and market volatility are also factors to consider, as major expenses or significant market downturns can impact the viability of the 4% rule.


It's always advisable to consult with a SEBI-registered financial advisor to tailor a retirement plan that suits your unique needs and circumstances.


Tool To Assist For A Secure Future


Remember, the goal is not just to save but to save wisely. The Rule of 4% is a tool to help you do just that, ensuring a comfortable and secure retirement.


It offers a systematic approach to withdrawals, ensuring that your savings continue to generate returns while providing a steady income.


So, here's to you, future retirees.


With the Rule of 4% as your financial compass, may you navigate the golden years with confidence and peace of mind.


After all, you've earned it!