A withdrawal rate is your first year's withdrawals as a percentage of your corpus at retirement. Draw ₹4.8 lakh in the first year from ₹1 crore, and your withdrawal rate is 4.8%. It is one number, but it largely decides how long the money is likely to last.
What the rate does
For illustration, take a ₹1 crore corpus earning a hypothetical steady 8% a year, with withdrawals raised 6% each year to keep pace with assumed inflation:
| Monthly withdrawal in year one | Withdrawal rate | Illustrative years the corpus lasts |
|---|---|---|
| ₹30,000 | 3.6% | about 45 |
| ₹40,000 | 4.8% | about 29 |
| ₹50,000 | 6.0% | about 21½ |
| ₹60,000 | 7.2% | about 17 |
Small changes in the starting rate make large differences in how long the money lasts. At an assumed 7% return instead of 8%, the ₹40,000 plan lasts about 25 years rather than 29.
Where the 4% idea comes from
A widely cited 1994 study of historical US market returns found that an initial withdrawal of about 4%, increased each year for inflation, would have lasted at least 30 years across the periods studied. The finding is specific to its data. Inflation in India has generally been higher than in the US over long periods, and the mix of assets, returns and costs differs, so a rate that held up there may not transfer directly.
The order of returns
A steady 8% never happens in practice. A sharp market fall in the first few years of retirement, while withdrawals continue, does lasting damage, because units are sold at low prices and fewer remain to recover. The same fall later does far less harm. This is called sequence-of-returns risk.
Keeping withdrawals flexible
- Hold a cash buffer. One to three years of spending in low-volatility options means you need not sell growth assets in a downturn.
- Use guardrails. Skip or reduce the inflation increase after a poor year; resume it after a good one.
- Review annually. Recalculate the sustainable withdrawal as the corpus, expenses and remaining years change.
Using an SWP for retirement income covers the bucket approach in detail, and the SWP Calculator lets you test withdrawal rates on your own assumptions.