We discuss thumb rules to judge retirement corpus health using safe withdrawal rates (SWR). This discussion also answers broader questions like, ‘When can a retiree take risks after retirement?’ and ‘How much equity exposure can I have after retirement?’
Note: In this day and age, using a proper retirement calculator only takes a few minutes. So, there is no benefit in using thumb rules or guidelines, which could be overestimated or underestimated for a specific situation. For an example, see Retirement plan review: Am I on track to retire by 50?
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 at the start of retirement, and IWR conveys this better.
*For those with a guaranteed pension, this withdrawal amount can be defined as annual expenses minus annual pension. For those with an indexed pension (that is pension that increases with dearness relief), we can assume the rate at which the pension and expenses increase are approximately the same.
The following must be considered as an opinion based on creating retirement planning calculators and backtesting retirement strategies for over a decade 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. The corpus is likely adequate. 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. The corpus is likely inadequate. 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 corpus is neither robust nor grossly insufficient. 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.