Retirement planning is no easy thing to do. While the emotions are on a separate roller coaster, the ground realities make you weak on the knees. It is better to be prepared before-hand rather than be in a state of confusion later.
While you watch-out for a sustainable retirement plan, you may come across a number of thumb rules which guarantee a simplified planning process. One such thumb rule is the 4% rule of retirement which takes into consideration how much amount you should or can withdraw from your retirement corpus per year.
The 4% retirement rule
The rule discusses the amount you can withdraw from your retirement funds per year which it says is approximately 4% of the total portfolio value from the starting value of your funds.
Let us understand this with an example,
You have Rs. 1 Cr when you retire, then according to the 4% rule, you can withdraw 4% of the total amount per year, so for the first year, the amount which can be withdrawn is Rs. 4,00,000 which 4% of Rs. 1,00,00,000.
The main purpose of this rule is to provide with an idea of steady income stream during the retirement years and maintain a desired balance in the account to keep the money grow with a mixture of investments made.
It is generally believed that the 4% rule is a safe way of calculating withdrawals since it majorly comprises of returns and dividends.
Factors affecting the rule
There are several factors which affect the rule and the right percentage of withdrawal;
While the rule is a general illustration of withdrawal rate post-retirement, it does not take into account the inflation which may occur. Also, the overall percentage of withdrawal may be different every year since economies move on a yearly basis.
- Life expectancy
Another important factor that might alter the percentage of withdrawal is the life expectancy of an individual. If you live longer that would mean you would need more funds in your account through those years hence the withdrawal percentage may decrease. Retirees who live longer will definitely need their portfolios to be more yielding for a much longer duration.
- Medical bills
This is an associated factor with life expectancy. Old age has its own pros and cons. While you may be free from the family responsibilities and social obligations, your body will now start demanding much more care. During the course of retirement years, the maximum amount of money goes towards medical bills. This factor would also play a significant role in determining the withdrawal percentage.
Who should avoid 4% rule?
While the 4% rule is a generalized one, there may be many scenarios when you will feel the need for a much more complex and advanced equation. Following may be such scenarios where 4% rule will not do much good;
- In case of a portfolio with high-risk stocks
- In case the investments are not regular
- In case being over-conservative is not your style