Retirement Savings: The 4 Percentage Rule and Personalized Calculations

Greetings,

There is no one-size-fits-all answer when it comes to determining the recommended amount of money you should save for retirement. It largely depends on your expenses, lifestyle, family needs, and personal financial goals. However, there is a well-known thumb rule that can provide a good starting point: the 4 percentage rule.

The 4 Percentage Rule

The 4 percentage rule suggests that to maintain a comfortable retirement lifestyle, you should have a retirement corpus that is 25 times the amount you withdraw in the first year of retirement. This means that if you plan to withdraw Rs 10 lakhs (or $14,300) in the first year of your retirement, you would need a retirement corpus of Rs 2.5 crore (or $357,500).

An Example Calculation

Let's illustrate this with an example:

- If you need Rs 10 lakhs for your first year of retirement,
- Then you would need a retirement corpus of Rs 2.5 crore (10 lakhs * 25).

Origins and Assumptions of the 4 Percentage Rule

The 4 percentage rule was initially proposed by William P. Bengen, a financial planner, in the 1990s. His study, which examined actual US data from 1926 to 1992, concluded that a 4% withdrawal rate was sustainable for 30 years. However, it is crucial to note that the rule was developed in the context of the US economy, and its applicability may vary in different economic environments, such as India.

Key Factors to Consider

Two important factors that you should consider are:

Inflation Rate: The inflation rate in India is much higher than in the US, which can significantly impact your retirement savings. Desired Retirement Age: If you intend to retire early, at around 34, 40, or 45 years of age, a 30-year longevity of your retirement corpus may not be sufficient.

For these reasons, it is important to understand that the 4 percentage rule might not be entirely applicable in the Indian context. Here are your two main options:

Option 1: Stick to the 4 Percentage Rule and Opt for Semi-Retirement

One strategy is to stick to the 4 percentage rule and opt for semi-retirement. This might involve working part-time to supplement your retirement income.

Option 2: Adjust Calculations Based on Unique Needs

If you want to retire with no additional income, you will need to do the retirement math based on your specific needs. This can be a more complex task, but we have created a simple and easy-to-use Excel retirement calculator to help you through this process.

To use the calculator:

Input your age at retirement and other key details. The calculator will display the age until which your investments will cover your post-retirement expenses.

While the 4 percentage rule simplifies the process, it is essential to consider your unique financial situation and plan accordingly.

Wrap Up

The 4 percentage rule became widely known with the rise of the Financial Independence Retire Early (FIRE) movement. It simplifies the process but personal finance planning is always personal. So, consider your unique needs and plan diligently using our calculator.

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