Sunday, 30 October 2011

India Early Retirement Safe Withdrawal Rate

In an earlier post, I had touched upon the concept of Safe Withdrawal Rates, and lamented the fact that most Indian financial planners and retirement gurus seem completely oblivious to the whole concept.  Simply put, a safe withdrawal rate is the percentage of your final retirement corpus that you can safely use for annual expenses, without running out of money over the lifetime of your retirement.  It is critical to be able to predict this as accurately as possible to help you with your retirement planning.  For example, if you have accumulated a retirement corpus of Rs50 lakh (about USD $100,000 at today's weakened Rupee to Dollar conversion rate), and want to use it to fund over 20years of retirement expenses for yourself and spouse (assume you are retiring in your 60s, and based on your family history, expect to live into the 80s), you will need to know how much money you can pull out in the first year of retirement to fund your living expenses.  Would you be ok with pulling out Rs2 lakh in the first year, or can you take out as much as Rs5lakh?  How about in the next year? How do you make these plans in a systematic manner?  This is what SWR is all about.
There is a lot of research and literature regarding SWRs in developed economies like the US, where there is tons of historical data regarding asset class performance over long periods of time (basically the historical rate of return from stocks, real estate, bonds, treasuries etc) that can be used along with historical macro-economic data like inflation, GDP growth etc to reasonably predict a useable SWR into the future.  However in an emerging economy like India, a lot of these key inputs are either not reliably available, or changing so fast, that it becomes very difficult to predict SWR in the Indian context. 

I had come across this article titled Safe Withdrawal Rates from Retirement Savings for Residents of Emerging Market Countries written by Dr. Wade Pfau, who is an Economics professor at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo.  So I specifically put forward 2 questions to him.  What was his opinion for a Safe Withdrawal rate that I could use in India? and (2) How should I adjust the SWR if I was planning on an extended retirement period spanning 60 years. 

Wade was kind enough to put together a detailed response on his blog titled Do-it-Yourself Safe Withdrawal Rates to my queries.  The summary is that predicting SWRs in an emerging economy like India is very difficult given the lack of historical data, and the rapidly changing emerging market dynamics.  His feedback is that for new retirees, it is the future asset returns that matter, and the ability to predict these returns is the key to being able to predict how much to withdraw from your retirement corpus per year.  For an extended retirement period he suggests reducing the withdrawal rate by 0.5-1% to increase the probability of success (i.e. your money out-living you)

I appreciate the thought he has put into the matter, and the various links he has provided with additional data and analysis on the subject.  My goal will be to review the material he has provided, and use it to estimate an SWR that I can use for my own retirement planning.


  1. Hi,

    If you put together a table like what you see in Table 4 of my article

    "Capital market expectations, asset allocation, and safe withdrawal rates"

    and also tell me an acceptable probability of failure such as 10%

    (the failure probability doesn't necessarily need to be too low, because you can always cut your spending if things are starting to look bad)

    then I will be happy to report the results to you.

    Best wishes, Wade

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