How Long Will My Money Last? Withdrawal Maths

A key retirement question is: how much can I withdraw each year without running out of money?

The 4 percent rule

In 1994, US financial planner William Bengen studied historical US stock and bond returns. He found that a retiree who withdrew 4 percent of their savings in the first year, then increased the amount with inflation each year, would not have run out of money over 30 years in any historical period he studied.

This became known as the 4 percent rule.

Turning it into a target

If you can withdraw 4 percent a year, you need savings of about 25 times your annual expenses.

• Annual expenses of 6 lakh rupees x 25 = 1.5 crore rupees.

Why Indian planners are more cautious

• Higher inflation in India than in the US over many periods means withdrawals must rise faster.
• Longer retirements: early retirees may need money for 40 years or more.
• Different returns and market histories.

Many Indian planners suggest a lower withdrawal rate, such as 3 to 3.5 percent, which means savings of about 30 to 33 times annual expenses.

A simple test

If you have 1 crore and withdraw 5 lakh a year (5 percent), rising with 6 percent inflation, and your savings earn 8 percent, your money lasts roughly 25 to 28 years, depending on whether you withdraw at the start or end of each year. Withdraw 3 lakh (3 percent) instead, and under the same assumptions it lasts more than 50 years.

The exact answer depends on returns, inflation and the order of returns, called sequence of returns risk: poor returns early in retirement do more damage.

Making withdrawals safer

• Keep a few years of expenses in safe assets to avoid selling shares in a crash.
• Be flexible: reduce spending in bad years.
• Use annuities or pensions to cover basic needs.
• Keep some equity to beat inflation over long periods.