I encountered an interesting YouTube comment: “3% withdrawal is safe to retire at what age? The withdrawal rate is clear, but I am not sure if it has age attached to it. The longer the post-retirement life, the higher the uncertainty?”
What does the term “safe withdrawal rate” mean? The safe withdrawal rate, or SWR, refers to the amount of money that can be withdrawn annually from a retirement fund in the first year of retirement. This rate is calculated by dividing the initial withdrawal amount by the total money available for retirement. Typically, backtesting is employed to determine a suitable SWR. By analyzing data from both equity and debt markets, we can establish the withdrawal rate that allows the retirement fund to last longer than the individual’s lifespan in most cases. It’s important to note that the SWR only represents the withdrawal rate in the first year of retirement, and subsequent years may naturally involve higher rates.
To answer the question, yes, SWR depends on the retirement age and, therefore, the years in retirement. We will do a crude calculation to illustrate this. Naturally, some of these are not practical, but it is only to illustrate the idea that SWR is age-dependent. We will only change the variable marked in blue below to keep things simple.
SWR heavily depends on inflation after retirement and portfolio return after return (real return after retirement). We have kept these the same here. For the same retirement age, higher the real return, higher the SWR.
50 years in retirement!
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- Current Age 20
- Expected age at death: 80
- Retirement age 30
- Monthly expenses 40000
- inflation before retirement 8%
- inflation after retirement 7%
- return after retirement 7%
- Withdrawal rate (ann expenses/Corpus) 2.00%
40 years in retirement!
- Current Age 30
- Expected age at death: 80
- Retirement age 40
- Monthly expenses 40000
- inflation before retirement 8%
- inflation after retirement 7%
- return after retirement 7%
- Withdrawal rate (ann expenses/Corpus) 2.50%
30 years in retirement!
- Current Age 40
- Expected age at death: 80
- Retirement age 50
- Monthly expenses 40000
- inflation before retirement 8%
- inflation after retirement 7%
- return after retirement 7%
- Withdrawal rate (ann expenses/Corpus) 3.33%
20 years in retirement
- Current Age 50
- Expected age at death: 80
- Retirement age 60
- Monthly expenses 40000
- inflation before retirement 8%
- inflation after retirement 7%
- return after retirement 7%
- Withdrawal rate (ann expenses/Corpus) 5.00%
So, the lower the years in retirement, the higher the initial/safe withdrawal rate; that is, we can afford to draw more. Which makes sense. There is one other consideration, though.
For the above numbers,
- Retirement at 60 would need Rs. 2.1 Crores.
- Retirement at 50 would need Rs. 3.1 Crores.
- Retirement at 40 would need Rs. 4.1 Crores.
- Retirement at 30 would need Rs. 5.2 Crores.
This is because the longer the retirement period, the more money is needed for inflation-protected income. This scenario is a bit different (because it is artificial) than this: Retire early to lower your retirement corpus!
Additional considerations on the SWR can be found here: What should be my safe withdrawal rate for retirement?
Detailed retirement planning illustrations using the freefincal robo advisor tool are here:
- I am 30 and wish to retire by 50; how should I plan my investments?
- Retirement plan review: Am I on track to retire by 50?