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.

India Early Retirement and Formula F1 Racing

Formula F1 Racing debuts in India for the very first time today, at the 875 acre Buddh International Circuit.  The high octane world of car racing is as alien to me as bob-sledding is to Jamaicans (obscure reference to the movie Cool Runnings)  It takes some patience and extreme passion to enjoy watching several futuristic looking cars, that all look pretty much the same to me, hurtling around an odd shaped track of 5.14Km (about 2.34Miles) over 60 times.  The fastest drivers can complete one circuit in as little as 1.5mins, setting an average speed of over 200Kmph.  Still there is a lot of interest in this fast growing sport in India, and we expect the popularity of car racing to grow exponentially in coming years.

Early Retirement Extreme : Jacob Lund Fisker

Jacob has put together an extremely well written blog detailing his path to achieving early retirement at an accelerated pace.  You should browse his writings here at Early Retirement Extreme -The choice nobody ever told you about.  Here is a short synopsis:  Jacob got his PhD in Theoretical Physics by the age of 25, and then worked for 5 years in the US.  During this time, he saved upwards of 75% of his income, and invested it wisely (though not necessarily with great success)  At the age of 30 he was done with the rat race, and by 33 he had completely retired.  Some of his suggestions (like eating frugally, basically eating only one type of canned food) are very extreme, but then that is the entire thesis of his blog.  He has several other suggestions on frugal living, some of which I agree with, and several that I do not.  Jacob also does not have any kids, so that makes his situation very different from mine.  I think planning to retire early, when one has kids to take care off and raise poses some unique challenges that he wouldn't be aware off.  Finally his current lifestyle seems to be a little on the "edge", with a high risk medical insurance strategy, and extreme frugal living

In any case, his determination is what makes his early retirement possible, and there is a lesson to be learned there.  On the other hand, I postulate that his extreme approach is not necessary in the India context.  Our environment in India allows for a moderate lifestyle without incurring significant expenses.  I will try to provide some insight into how we plan to achieve similar savings goals as Jacob, without necessarily living a life as frugal as he did/does.

Early Retirement : Safe Withdrawal Rate (SWR)

Safe Withdrawal Rate or SWR, in the context of retirement (early or otherwise), was a term coined by William Bengen.  Bill wrote about SWR in the Journal of Financial Planning in October 1994.  He proposed that once you have accumulated your retirement corpus, you should withdraw only 4% of the corpus for your expenses on a yearly basis (adjusted for inflation of course).  As long as you maintain the 4% withdrawal rate, you will never run out of money throughout your retirement years.  If you increase your withdrawal rate to 5%, you have a high probability that your money will run out before you die. 

This is a very fundamental thought that every retiree has to go through.  How much can I afford to withdraw every year for my living expenses?  If I withdraw too much, I run the risk of running out of money soon.  If I withdraw too little, I am forcing myself to live a more frugal lifestyle than I can afford, and will not be able to live my retired years to their fullest potential. 

Bill based his analysis on historical return rates of stocks and bonds, and looked at real scenarios over the last 75 years.  He analyzed different withdrawal rates, and back tested the probability of your initial retirement corpus running out, across various time-frames over the last 75 years to prove his hypothesis.  This is a seminal piece of work, and if you have the interest, you should read the original article by William Bengen. 

Amazingly enough, financial planners in India, almost never quote or even refer to Safe Withdrawal Rates.  The entire concept seems to be alien to wealth managers here.  Typically a simple mathematical formula assuming a 6% or 8% inflation rate is used to figure out how your expenses in retirement will increase.  The effect of compounding is then typically used to frighten the lay person with the large numbers that invariably result from the long 30-40year retirement scenarios.  Finally a 12-15% rate of return is assumed on your invested corpus to figure out how long your corpus will last, or how much you will need to save up to last through your retirement years.

Of course the SWR will vary from country to country based on the historical data, current inflation scenario, future GDP growth prospects etc.  Currently financial planners in India seem to take these into account in a ad hoc manner, and are in general oblivious to SWR in the Indian context.

I recently came across a study done in Japan, that attempts to determine the SWR in emerging markets.  I have contacted the authors to understand their thesis a little better, and seek permission from them to share their results with you. 

In the meantime, I will publish a couple of more articles describing how SWR works in the coming days, with some examples and illustrations.

Early Retirement : Philip Greenspun

Who the heck is Philip Greenspun?  Well Phil has a PhD from MIT, has started several successful businesses, seems like an extremely articulate and witty guy, has his pilots license, and most importantly retired at the young age of 37.  If you'd like to read up more about him, here is where you go: Philip Greenspun on Early Retirement

Retire Early Homepage

Here is a website that solely caters to the early retired, or the early retiring aspirants.  Retire Early Homepage, does contain a lot of useful material that you can browse through.  Unfortunately, for folks in India, most of this content seems to be geared for people in the US, and though the fundamentals are sound, the specifics cannot be applied as-is in the Indian context.

Retire Early and Travel

Now that I have become "more involved" with my retire early planning, I have come across a lot of material out there, about people who have already trudged this path and taken the plunge.  I love reading about these "case-studies" as it helps to fine tune my own thinking.  One more such example is about Warren and Betsy, the folks at Married with Luggage.  They have retired at the age of 40, and plan to travel around the world.  They also document all their expenses here.  I think the learning for me here is (1) It is important to make a plan and then put in all my energies to execute to it (2) It pays to be methodical, particularly when it comes to documenting expenses (3) It helps to be internet web savvy.  You can churn out a lot of good material, if you are very comfortable with the medium.