This article brings together the interrelationship between the size of the retirement corpus, inflation, asset returns, longevity and the amount you wish to spend in retirement.
This article is a part of our detailed article series on Safe Withdrawal Rates. Ensure you have read the other parts here:
This article shows how much you can withdraw from an equity mutual fund if you have a pension plan as well in retirement.
We examine the results of running a long-term SWP in index funds for retirement.
This article shows that if you decide to retire today, how long will the corpus last realistically based on real rates of return.
This article shows the maximum withdrawal in SWP form that you can take out from a retirement portfolio to make it last 30 years.
The article investigates if you can retire in India with only 25x your expenses saved as retirement corpus.
“nastiest, hardest problem in finance.” - William Sharpe, Nobel Prize winner, regarding the withdrawal stage of retirement
This article tries to bring the competing factors in play when deciding on a retirement corpus, early i.e. FIRE or normal or abrupt (when you are phased out of your current role). There are a few things that we need to keep in mind:
For simplicity, we will exclude any generational wealth you plan to pass on since those must be handled outside the retirement portfolio.
We will define these two terms first:
SWR = the percentage of your portfolio that you withdraw in Year 1 of retirement and then increase that amount by inflation every year
The Safe Withdrawal Rate (SWR) is used to calculate the percentage of the portfolio that will be withdrawn in retirement every year.
FIRE number = 1/SWR is the amount of money you have as a multiple of your first-year expenses in retirement
For example, if you plan to spend around ₹1 lakh/month (₹12 lakhs/year) in retirement and you have ₹5 crores of retirement corpus, then:
FIRE number = 500 / 12 = 41.67x
SWR = 12 / 500 = 2.4%
We need to keep in mind two things:
These returns in the table are of course pre-tax.
We use the simple IRR function in Excel to estimate the returns. Using the IRR function in Excel or Google Sheets like this for the 5 crore, 12 lakhs, 7% inflation example:
Required nominal return = IRR(-500,12.00,12.84,13.74, …)
Required real return = Nominal return - Inflation (approximately)
Since it is very common to estimate your retirement expenses and see if you can fit that into your corpus, we will now show a couple of tables of corpus size vs. longevity and see the target return.
Here the basic premise is that if, simplistically speaking, you have ₹10 crores and you spend ₹1 lakh/year, then even an SBI savings account will last you a lifetime. We have covered some of those calculations here: How much returns should you expect from your retirement portfolio?.
In the charts below, we have used 7% inflation. Real-life inflation due to aspirational items (like foreign travel) and healthcare costs will make this number much higher for most people.
This chart shows that if you think you will live for another 40 years, which is not difficult thanks to modern medicines that will keep you alive longer than you think, and you have 40x corpus already available, then you need just 6.65% lifetime returns from the portfolio. This is not a bad return considering it comes below the 7% inflation.
However, if the corpus available drops to just 35x, the required return jumps to 7.35% which is above inflation and therefore difficult to achieve.
The chart below this shows the same data but with real returns (nominal returns minus inflation).
The charts have an easy-to-follow colour scheme:
These charts can be used to answer the following questions:
You can divide the corpus by your expenses and then look up the figures as per your age which will give you the number of years in retirement. Once you have the required return figure, see in which zone it falls: red, white or green and get the answer from there. In some cases, you might wish to defer your FIRE plan.
Related:
FIRE journey in India: what happens if you work just a bit longer
If your corpus and expenses are mostly in the green zone, then you will be mostly fine with just FD. Flooring the retirement income via an annuity (i.e. pension plan), so that your income never falls below the pension amount.
Related:
Do Retirees with a Pension Still Need Equity Mutual Funds?
If you are in the white zone, then creating a cash, debt and equity bucket portfolio can work very easily. We have covered this topic in detail here: How much equity should you have in your retirement portfolio?.
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This post titled Safe Withdrawal Rates and Required Portfolio Returns For Retirement Planning first appeared on 06 Jan 2025 at https://arthgyaan.com
