Updated on September 27th, 2022
We all have a comprehensive savings and investment plan but what about having a viable expenditure plan to enjoy the fruits of your savings and investment to the maximum. How much should you leave behind when you die? Is it wise to leave behind a huge estate and funds portfolio when you depart from this world. You have many financial consultants who would advise you how to multiply your savings and investment. But how many professional consultants you have who, after taking into account your longevity, health state, your insurance covers, your net worth and your life style would advise you on how much you can spend to enjoy your life rather than depart leaving the unused wealth to your children who themselves are independent and well to do.
The cost of living and expenditure pattern of people who have retired varies from country to country and culture to culture. For example, in a country like USA, under normal circumstances, to live a comfortable retired life, you need a minimum of $ 3500 per month, whereas in a country like India you can live a comfortable life with $ 1350 (Rs 1 Lakh) per month. You can even live a comfortable life with a lesser amount in India if you cut down on your luxuries.
In India, at the age of 75 when Thomas departed from this world due to a sudden heart attack, he had left behind a net worth of Rs 750 Lakh ($ 1 million). Looking back in his life, he had maintained a frugal life style, at times even sacrificing his entertainments for the sake of saving money for future.
Retirement Corpus & Expenditure
Most retirees have made their money through hard work, savings and investments. The main goal after retirement is not to grow your nest egg, but to preserve it and live off the proceeds. This gives rise to the question as up to what age one should continue to save and keep adding to his corpus even after retirement for an uncertain future. What should be the ideal age after retirement to start withdrawing your assets systematically and start using them to improve your quality of life so that you can enjoy your entire lifetime savings on yourself. Ideally, when one departs from this world, he must leave behind money just adequate to meet his liabilities and funeral expenses. But it is easier said than done.
This calls for an optimum withdrawal plan to use your corpus which you have accumulated in your entire life. The withdrawal plan needs to be an important part of comprehensive Personal Financial Planning for all Retirees.
Sources of funds for Retirees
Retirement Corpus (Comprising of Gratuity, Provident Fund, investments and accumulated savings)
Pension (if retired from a pensionable job)
Social Security (Varies from country to country)
Rental income, if any
Most of the retirees who retire from corporate or private sector have only their retirement corpus to live on.
Withdrawal Options
Now coming to optimum withdrawal plan from your retirement corpus, there is famous 4% Rule which was advocated by financial planner William P. Bengen in 1994. His study found that you could withdraw 4% of your retirement nest egg and adjust for inflation each year and your money should be able to last you over thirty years. It was based on the calculation that a portfolio consisting of 60 percent stocks and 40 percent bonds could expect an average compounded return of 8.2 percent. The “real” return, adjusted for inflation, would be almost 5.1 percent. You may go through ‘Insights on Using the 4% Withdrawal Rule From Its Creator’.
Applicability of 4% Rule to various Countries
The results of this study are, by and large, still applicable to country like US. However, For a country like India, which has an inflation rate nearly 6%, this rule needs be applied with caution. Presuming that a retiree has 50% of his investments in safe instruments like Bank Fixed Deposits and 50% in Mutual Funds/Equity, he can expect a safe average compounded rate of return of nearly 8.5 % in the long run. This Rate of Return has been calculated assuming that safe instruments fetch 7% and Mutual Funds give a return of 10% pa making the average to 8.5% pa. With the inflation rate being nearly 6% in India, the safe annual withdrawal rate in India works out to be 2.5% . This will keep the value of the corpus intact after making adjustments for inflation. The corpus would continue to grow proportionate to the rate of inflation, indefinitely, leaving your real value intact.
Withdrawal Rate 2.5%
Conversion rate: 1$= ₹75 (INR)
Let us take an example from India where an individual retires at age of 60 with a corpus of Rs. 100 Lakh ($133,333). As per WHO data of 2018, the life expectancy in India is 68.8 (67.4 for males and 70.3 for females). Granting the maximum to this retiree with his good health and better lifestyle, let us assume that his life expectancy is 80 yrs. This means that a retiree has nearly 20 more years to live. If a retiree withdraws 2.5% of his entire portfolio every year, in the first year of his retirement he gets 2.5 Lakh ($3,333) pa or Rs. 20,833 per month increasing every year adjusted to inflation. In the 70th year of his life, his 2.5% withdrawal would amount to 4.5 Lakh ($6000) or Rs. 37,500 per month and in 80th year of his life, it would be Rs. 8 Lakh ($10,666) or Rs. 66,666 per month. His inflation adjusted corpus in the 80th year would be Rs 340 Lakh ($453333). Even if he lives beyond 80, it does not matter, he still can continue to withdraw 2.5% every year indefinitely till he lives while keeping his corpus intact. The real value of his corpus would remain 100% after making adjustments for inflation. The table below makes it clear.
Effect of 2.5% Withdrawal on Corpus (Rs in Lakh)
Conversion rate: 1$= ₹75 (INR)
Note: All calculations in all the tables are based on Rate of Return of 8.5% and average inflation rate of 6%. Conversion rate: (1$= ₹75)
| Age in Years | Starting Corpus | Annual Withdrawal (2.5%) | Ending Corpus RoI = (8.5-2.5%) |
| 60 | 100.0 | 2.5 | 106.0 |
| 65 | 133.8 | 3.3 | 141.9 |
| 70 | 179.1 | 4.5 | 189.8 |
| 75 | 239.7 | 6.0 | 254.0 |
| 80 | 320.7 | 8.0 | 340.0 |
| 85 | 429.2 | 10.7 | 454.9 |
| 90 | 574.3 | 14.4 | 608.8 |
| 95 | 768.6 | 19.2 | 814.7 |
| 100 | 1028.6 | 25.7 | 1090.3 |
So, does it not make sense to withdraw a higher percentage of your corpus, if you need it for improving your quality of life and enjoy your life to the maximum? Is it necessary to leave your 100% corpus intact even after you are 80 or so, or should you withdraw more and leave your inflation adjusted corpus at a reasonable value, say 80% when you die? Let us say that our retiree, at the age 60 now decides to withdraws 3.5% of his corpus every year. His annual withdrawals and residual corpus every five years are shown in the following table.
Withdrawal Rate 3.5%
Conversion rate: 1$= ₹75 (INR)
This would give him Rs. 3.5 Lakh ($4666) or Rs. 29,166 per month in the first year and Rs. 9.3 Lakh($12,400) or Rs.77500 per month in the 80th year. The effect on the corpus would be that at the end of 80th year if he dies, he will still leave behind a corpus of Rs. 278 Lakh ($370666). If he survives beyond 80, his 3.5% withdrawal rate with still fetch him Rs 15 Lakh ($20,000) at age 90 or Rs. 125,000 per month and 24.6 Lakh ($32,800)or Rs. 205000 per month at age 100 with a residual corpus of 453 Lakhs ($604000) and 739 Lakh ($985333) respectively. However, as we are not fully compensating for 6% inflation, the real value of your corpus at 80 yrs would be 82% and at 90 yrs it would be 74.5%. The table below makes it clear.
Effect of 3.5% Withdrawal on Corpus (Rs in Lakh)
Conversion rate: 1$= ₹75 (INR)
| Age in Years | Starting Corpus | Annual Withdrawal (3.5%) | Ending Corpus RoI= (8.5%-3.5%) |
| 60 | 100.0 | 3.5 | 105.0 |
| 65 | 127.6 | 4.5 | 134.0 |
| 70 | 162.9 | 5.7 | 171.0 |
| 75 | 207.9 | 7.3 | 218.3 |
| 80 | 265.3 | 9.3 | 278.6 |
| 85 | 338.6 | 11.9 | 355.6 |
| 90 | 432.2 | 15.1 | 453.8 |
| 95 | 551.6 | 19.3 | 579.2 |
| 100 | 704.0 | 24.6 | 739.2 |
Withdrawal Rate 5%
Conversion rate: 1$= ₹75 (INR)
Let us assume that our retiree decides to withdraw 5% of retirement corpus every year. This would give him Rs. 5 Lakh ($6666) or Rs. 41,666 per month in the first year and Rs. 10 Lakh ($13,333)or Rs. 83,333 per month in the 80th year. At the end of 80th year if he dies, he will still leave behind a corpus of Rs. 206 Lakh ($274666). If he survives beyond 80, his 5% withdrawal rate with still fetch him Rs 14 Lakh ($18666) at age 90 and 20 Lakh ($26,666) at age 100 with a residual corpus of 291 Lakhs ($388000) and 410 Lakh ($546666) respectively. However, due to inflation the real value of your corpus at 80 yrs would be 60% and at 90 yrs would be 48% of inflation adjusted value. If all his insurances are in place, he can exercise this option. In all probability, you will not outlive your corpus. Assuming that you may need more money in your 80s and 90s on elderly care bills, this withdrawal rate may be exercised with caution.
Effect of 5% Withdrawal on Corpus (Rs in Lakh)
Age in Years | Starting Corpus | Annual Withdrawal (5%) | Closing Corpus Addition RoI= (8.5%-5%) |
| 60 | 100.0 | 5.0 | 103.5 |
| 65 | 118.8 | 5.9 | 122.9 |
| 70 | 141.1 | 7.1 | 146.0 |
| 75 | 167.5 | 8.4 | 173.4 |
| 80 | 199.0 | 9.9 | 205.9 |
| 85 | 236.3 | 11.8 | 244.6 |
| 90 | 280.7 | 14.0 | 290.5 |
| 95 | 333.4 | 16.7 | 345.0 |
| 100 | 395.9 | 19.8 | 409.8 |
Optimum Withdrawal Plan
Conversion rate: 1$= ₹75 (INR)
So depending upon your income flow and your requirements for living a good quality life, one need not hesitate to withdraw between 2.5 to 3.5% of retirement corpus from the first year of your retirement itself. This will not affect your corpus adversely. While at 2.5% withdrawal your corpus will retain its real value through out your life, at 3.5%, its real value will drop to 82% at the age of 80 yrs which is acceptable. If the rate of return goes beyond 8.5% or the rate of inflation goes less than 6%, you will have more money in your corpus than calculated. However, the reverse can also be true. Although, the historical data has been considered for calculating average long term returns and rate of inflation, the returns on mutual Funds/equity may vary. Accordingly, variations may be made in your withdrawal rates, if necessary.
Some Examples:
Mr A retired with a pension of Rs 7 Lakh pa and a retirement corpus of Rs. 75 lakhs and a savings of Rs 25 Lakhs in his provident fund. He has no other source of income. His annual expenditure comes to 10 Lakh. Withdrawal from his corpus of Rs 1 Cr at the rate of 2.5% (safe withdrawal) gives him 2.5 Lakh pa or Rs. 20,333 per month in the first year of his retirement. Thus his total annual disposable income with him would be Rs 9.5 Lakh which is 0.5 Lakh short of his expenditure requirement. To make good his monthly expenditure he may increase his withdrawals to 3% which will give him 3 Lakh pa or Rs. 25,000 per month in the first year, thus meeting his needs of annual expenditure.
Mr B retired from private sector with a retirement corpus of Rs 200 Lakh. He has no additional income and savings. To live a decent life, he should not hesitate to withdraw 3.5% per annum which will give hm a reasonable income stream of 7 Lakh pa, which works out to nearly Rs 58000 per month.
Mr C retired with a pension of Rs 60000, corpus of 150 Lakh and a rental income of Rs 40,000 pm. His net annual expenditure requirement is Rs 15 Lakh or Rs. 1,25,000 per month . His annual income stream from pension and rent works out to be 12 Lakh or Rs. 100,000 per month . He needs only 3 L more or Rs. 25,000 per month to meet his expenditure. He can easily withdraw 2.5% every year which will give him a value of Rs 3.75 Lakh in the first year of retirement or Rs. 31,250 per month and going up every year to adjust to inflation.
Do not hesitate to Withdraw to live better
Thus to conclude, a retiree should withdraw up to 3.5% of his corpus without any fear of running out of his money in his entire life. If he elects not to withdraw any money at all, he is going to leave behind a hefty sum to his heirs. In the examples given above, let us assume that our retiree with a corpus of Rs 100 lakh does not withdraw any money from his corpus. At the end of 100 years of his life, he will have a sum of Rs 1116 Lakh (11.16 times of his original corpus. If he is very well off and can live a luxurious life without withdrawals, leaving behind this large chunk of corpus can be understood. However, if he has been living a frugal life to make good his living within the available cash flow, not withdrawing to improve the quality of his life does not stand to reason. So spend your hard earned income for improving the quality of your life and enjoying your life to the maximum.
Some Useful Thumb Rules
