A reader wants to know, “Can I find out how much I need to invest for retirement without a calculator? Is there any thumb rule for this? Similarly, can I determine how much equity exposure I can have after retirement without a calculator?”
We discussed the first part of the question earlier: Estimate Your Retirement Investment Amount without a Calculator. The second question is a lot more difficult. We shall attempt to answer the broader but related question: when can a retiree take risks after retirement?
Alternatively, when can a retiree invest a significant chunk of her corpus in market-linked instruments like equity or debt mutual funds for appreciation and regular withdrawals via a retirement bucket strategy? For an example, see Retirement plan review: Am I on track to retire by 50?
We shall do this using the safe withdrawal rate. The safe withdrawal rate (SWR) is the annual withdrawal amount in the first year of retirement divided by the available retirement corpus. It is better to refer to this as the initial withdrawal rate (IWR) because many assume the SWR is applicable throughout retirement. It is valid only a the start of retirement, and IWR conveys this better.
The following must be considered an opinion based on creating retirement planning calculators and backtesting retirement strategies for over a decade and by repeated use of the freefincal robo advisor tool.
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IWR < 3.5% The retiree can afford to take on capital market risks. Keeping pace with inflation is a reasonable possibility. The lower the IWR, the better the chances of a comfortable retirement. For examples of IWR associated with (a) pure bucket strategy, (b) income flooring + bucket strategy and (c) annuity laddering with bucket strategy, see: I plan to retire in 25 years; what should be my safe withdrawal rate?
Note: It must be understood these suggestions do not talk about the quantum of risk one can take. That would need a precise post-retirement calculator.
IWR > 4.5% The retiree cannot afford to take on capital market risks. Most of the corpus must be used for a pension, with some cash stashed for emergencies. Trying to keep pace with inflation is off the table. The retiree would be susceptible to unexpected expenses and have to be quite frugal. For example, My withdrawal rate is 5%; what are my post-retirement investment options?
3.5% < IWR < 4.5% This grey area requires careful examination. The pension should be the dominant asset in the retirement basket, but perhaps a pinch of risk can be taken. Keeping pace with inflation will not always be possible, and some luck and cautious spending (when possible) would be necessary.