What is 4 per cent rule of withdrawal from corpus after retirement?

4 per cent withdrawal rule

The 4 per cent rule is a rule of thumb financial planners use to determine how much you can withdraw from your retirement corpus each year so that the corpus does not get exhausted. With the help of this rule, you can withdraw 4 per cent of your total retirement corpus in the first year of retirement. Later on, you inflation-proof the figure to maintain your purchasing power. This approach attempts to keep your money intact for 25 to 30 years or even more.

Retirement can be a period of decades, and if not properly planned, there are risks of depleting your corpus. The 4 per cent rule is a mere guideline to regulate withdrawals and maintain financial security. It prevents the retiree from taking excessive in the early years, depleting the corpus, and maintains a smooth income stream all through retirement.

To put the rule into practice, first determine your total retirement corpus. For example, if your retirement corpus is ₹1 crore, the rule puts the withdrawal at ₹4 lakh in the first year. In future years, increase it according to inflation, normally 5–6 per cent in India. This adjustment keeps you from draining the value of your savings without maintaining your lifestyle.

As well-liked as it is, the rule isn't perfect. It is constructed on typical market returns and inflation, which may not necessarily fit all scenarios. Retirees with higher or lower costs to maintain, or who live longer than expected, will probably need to adjust. It's a rule, not a divine prescription, and there has to be some wiggle room.

The 4 per cent rule is most effective when used in combination with other types of retirement planning. Diversified portfolios in equities, bonds, and fixed-interest stocks can generate long-term returns with minimal risk. Regular portfolio review and calibrated withdrawals according to the performance of the market will yield a steady income in retirement.