Welcome to the fourth post in the retirement planning series!
In the last post of our Retirement Series, we explored what the Safe Withdrawal Rate (SWR) is and how it helps you decide how much you can safely withdraw from your retirement corpus every year without running out of money.
We also discussed how the famous 4% SWR rule from the US doesn’t work well in India because of higher inflation and volatile returns.
But that leaves us with one big question: what actually works in India?
To answer that, we’ll turn to a fascinating research paper titled:
“Safe Withdrawal Rates in India: Balancing Portfolio Sustainability and Flexibility.”
In this post, let’s break down those insights shared in the paper, focusing on new concepts you need to master, what robust simulations actually tell us about retirement, and why flexibility is as important as caution.
Estimated read time: 5 minutes and 16 seconds
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Buckle up. Here we go!
Before we get into the findings, let’s first understand a couple of key concepts that make retirement planning tricky.
1. The Retirement Killer: Sequence of Return Risk (SoRR)
Most people think they can work out their retirement plan with averages. If your investments earned 10% over the past 30 years and inflation was 6%, shouldn’t a 4% SWR be safe?
Unfortunately, relying only on averages ignores the most dangerous risk facing retirees: the sequence of return risk.
This is arguably the most critical risk for a retiree. It doesn’t matter what your average return is over 30 years; what matters is the order in which those returns arrive.
Imagine two friends, Amit and Vikram, both retire with ₹1 crore. Both experience the exact same average market returns over 10 years.
- Amit’s luck: His first 5 years see negative returns (-10%, -5%, etc.), then good years follow.
- Vikram’s luck: His first 5 years are fantastic (15%, 10%, etc.), then bad years follow.
After 10 years, even though they had the same average returns, Amit’s portfolio is completely depleted. Vikram still has ₹20 lakhs left!
Why?
Because when you’re withdrawing money regularly, the order of returns matters just as much as the average.
When negative returns hit early in retirement, you’re forced to sell more units to meet your expenses. This leaves less money to benefit from the recovery later.
It’s like being caught in quicksand; the harder you struggle (withdraw), the faster you sink.
That’s why simply looking at average market returns and saying “equities give 12% returns, so I can safely withdraw 5-6% annually” is dangerously wrong.
Your retirement plan must be robust enough to survive unlucky timing.
2. Why We Need Simulations (And Not Simple Math)?
It’s tempting to plan your retirement using average returns and historical inflation rates. But that’s misleading. Real markets are volatile, and returns bounce up and down year after year, sometimes in unpredictable ways.
So, using averages alone gives a false sense of security.
That’s why financial planners and researchers use simulation methods, like Monte Carlo and Circular Bootstrap, to test thousands of possible scenarios.
They’re essentially asking: “What if markets crash in year 2 of retirement? What if inflation spikes for 5 consecutive years? What if both happen together?”
Each simulation tells us whether your money lasts. If, out of 1,000 simulations, your plan works in 950 of them, that means you have a 95% success rate.
Why 95% Success Rate Is “Safe Enough”?
Now you might ask, “Why not aim for 100% success? I don’t want to ever run out of money.”
Great question! Here’s the reality:
Aiming for a 100% success rate is the financial equivalent of wearing a seatbelt, helmet, and a full-body airbag suit just to sit on your sofa. It is technically safer, but practically useless.
To achieve 100% certainty, you would have to choose an extremely conservative SWR (say, 1% or 2%). This would mean two things:
- Massive Corpus: You would need an impossibly large retirement corpus.
- Unnecessary Restriction: You would unnecessarily restrict your spending and quality of life for 30 years, only to die rich and leave a colossal legacy, an outcome known as underutilised wealth.
The 95% threshold is a pragmatic balance. It means your portfolio will survive in 95 out of 100 scenarios. The remaining 5% represents extreme outlier events.
Moreover, in those 5% scenarios, you’re not suddenly destitute; you just need to make some adjustments to your lifestyle or supplement your income.
Think of it like home insurance. You don’t buy insurance that covers every possible scenario, including alien invasion. You cover the realistic, likely scenarios.
Right. Now that we have understood the Sequence of Return Risk, Simulations, and the 95% success goal, let’s look at the eye-opening findings of the research paper: “Safe Withdrawal Rates in India: Balancing Portfolio Sustainability and Flexibility”.
Want to see your own 95% success rate? Vrid’s Retirement Calculator runs 1,000+ Monte Carlo simulations to stress-test your retirement plan against Sequence of Return Risk.
The Golden Findings: How India’s SWRs Are Different?
Using data from 1992 to 2024 and sophisticated simulation methods, the study provides these robust, India-specific insights:
1. The 4% Rule is Outdated
The famous 4% Rule, born from research on US markets, has long been the global retirement benchmark. The Indian research confirms what we suspected: the 4% rule is too generic for India.
Why? High volatility and high inflation.
India exhibits a greater dispersion between arithmetic and geometric returns than the US, meaning the impact of volatility drag is stronger here, increasing the probability of that dreaded Sequence of Return Risk.
2. The Tax Revolution: Budget 2025’s Impact
Taxes are the single biggest factor influencing an Indian retiree’s SWR. The new tax proposal under Budget 2025 to raise the tax-free income threshold to ₹12 lakh is a game-changer.
- The Good News: For retirees in the lower tax bracket (Below ₹12 lakh), this reform significantly enhances SWRs, allowing them to withdraw between 3.5% and 4.2% of their starting corpus annually. The tax efficiency of the withdrawal plan directly translates into greater portfolio longevity.
- The Warning: For those in a higher tax bracket (30%), the tax burden remains significant. This requires a more conservative SWR of 2.7% to 3.2%.
A tax-aware withdrawal strategy is crucial. Every rupee saved in tax is a rupee that stays invested and compounds, making your retirement more sustainable.
3. The Optimal Retirement Portfolio: The 20%-50% Equity Sweet Spot
What’s the best asset allocation for a sustainable SWR in India? It’s not 100% equity, and it’s definitely not 100% fixed deposits.
The research confirms that portfolios with moderate equity allocations (20% to 50%) consistently achieve the highest SWRs.
- 100% Equity: While high equity offers the greatest long-term returns, it is the most vulnerable to volatility and SoRR. A sudden crash early in retirement can be fatal, forcing you to use a lower SWR.
- 100% Fixed Deposits (FDs): FDs are great for stability, but they have two problems: They often fail to keep pace with inflation over long horizons, and the high nominal tax rates on interest income severely reduce your real returns, which significantly lowers your SWR.
The 20%-50% equity mix strikes the perfect balance: enough stability from debt to weather early market downturns (mitigating SoRR) and enough growth from equity to beat long-term inflation.
4. Inflation: The Silent Killer
Inflation is not just a nuisance; it’s a portfolio shredder. The study found that even slight inflation shocks, especially in the early years of retirement, can significantly lower SWRs.
Every retiree experiences their own personal inflation, which can be different from the official index. This underscores the need for effective inflation management in the retirement plan.
5. Diversification with Alternative Assets
The paper also looked at other assets:
Balanced Advantage Funds (BAFs): These funds automatically adjust their equity exposure based on market conditions. The study found that BAFs and similar Nifty indices can enhance diversification and improve SWRs by naturally mitigating volatility, which is a significant plus in the Indian market.
The message is clear: A customised approach that integrates tax-efficiency, inflation management, and balanced asset allocation is the only way to achieve sustainable income and portfolio longevity in India.
Now, we encourage you to read the research paper to learn more before finalising your retirement plan, as we haven’t covered everything here.
And, if you want to run simulations and check the success rate of your retirement plan, you can do so here.
Final Thoughts
Retirement is not about chasing perfection. It’s about balancing comfort with safety.
The research makes one thing clear: Indian retirees can’t afford to copy Western rules blindly. Our inflation, markets, and social systems are different. So our approach to retirement planning must be different, too.
Just remember: You don’t need a perfect plan. You need a resilient plan, backed by informed choices and a flexible mindset.
Build your resilient plan now – try Vrid’s free Retirement Calculator to find your safe withdrawal rate and test it across market scenarios.
And in our next post in the retirement series, we’ll go a step further, we’ll talk about dynamic withdrawal strategies: how to adapt your withdrawals every year based on how your portfolio performs.
Share these insights with your buddies.
Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Vrid – Safe Withdrawal Rate: Why the 4% Rule Doesn’t Work in India? (Blog)
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.
