Retirement Planning: Assessing the Sufficiency of the 4% Withdrawal Formula

The Flawed 4 Percent Rule: Why India's Retirees Need a Smarter Approach

For decades, retirement planning has heavily relied on the '4 percent rule,' popularized by William Bengen in 1994. This formula suggested that retirees could safely withdraw 4 percent of their savings in the first year of retirement without running out of funds. However, the rule was never designed for India or other Asian economies and assumes a level of market performance that is not applicable globally.

India's Capital Market Reality

India's capital markets have delivered a healthy 16 percent Compound Annual Growth Rate (CAGR) between 1980 and 2025. However, the averages conceal falling rates. Between 1980 and 2000, equities delivered around 20 percent growth, while between 2000 and 2025, the growth rate tapered to around 12 percent. Debt markets also show a similar tapering trend.

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Debt markets show a similar trend, with earlier returns being higher than current ones. When taxation is considered, the returns become even more modest. Earlier, equity gains were tax-free, and debt enjoyed indexation benefits. Today, equity capital gains are taxed at 12.5 percent, while debt is taxed at slab rates. If we assume no taxation in the earlier period, a 50:50 equity-debt portfolio would have returned around 15.5 percent. Under current norms, with a blended tax rate, the same portfolio yields only approximately 8.5 percent.

Why the 4 Percent Rule Doesn't Fit India

It's noteworthy that William Bengen himself admitted that the 4 percent rule was not a universal truth. He identified eight factors that influence safe withdrawal rates (SWR): withdrawal scheme, planning horizon, tax status, legacy goals, asset allocation, rebalancing frequency, pursuit of above-market returns, and withdrawal timing. In the case of India, two of these factors stand out: tax status and asset allocation.

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Indian retirees need a larger corpus or lower withdrawals due to taxation and conservative investing habits. Most Indian retirees hold less than 50% in equities, which reduces growth potential and requires a higher corpus or lower withdrawal rate.

A Smarter Approach

Instead of chasing a fixed percentage, Indian retirees can adopt a customized withdrawal rate based on their individual circumstances. The following table shows withdrawal rates across different return and retirement scenarios.

Healthcare, the Wild Card

Medical costs are often the biggest variable in retirement planning. Factoring hereditary risks into routine expenses is essential, and securing comprehensive health insurance before retirement is non-negotiable. This not only reduces the strain on the corpus but also provides peace of mind in the long run.

The Bottom Line

The 4 percent withdrawal rule was created for the US, not India. Lower returns, higher taxes, and conservative investing mean Indian retirees may need a lower withdrawal rate. Instead of following a fixed formula, retirement planning should match individual realities, with regular reviews and focus on long-term sustainability rather than shortcuts.