What Should Be Your Retirement Withdrawal Rate?

Published: March 17, 2013 at 11:06 am

Last Updated on

Manish Chauhan’s second book, “How to be your own financial planner in 10 steps” is a great ‘action’ book guiding people through the basic steps of financial planning. This post describes a retirement calculator inspired by the book and is based on ‘corpus withdrawal rate’

Step no. 6 is “Start your retirement planning”. In this chapter Manish writes: “If you had to take only one learning from this book and implement it, I would suggest  that you take this particular point from this book and seriously save for your retirement. If you don’t do anything else, life will still move on, but this particular part cannot be ignored, simply cannot!”. The ‘point’ being, ‘delaying your retirement planning will put serious pressure on your retirement life’.

When I made the cost of postponement calculator (again a suggestion by Subra!) I was surprised to see that that the cost of postponement is deadlier than inflation. Each year you postpone saving for retirement the amount you need to save each month for building your retirement nest egg increases by an alarming 16% – the power of compounding has a dark side! This is almost twice as much as inflation!

The chapter on retirement planning is quite impressive and the all-important, “How much will you need at retirement” is addressed in terms of the ‘withdrawal rate’.

What is the withdrawal rate? If I have a corpus of 5 crores and if my annual expenses amount
to 12 lakhs, the withdrawal rate is 12/500 or 2.4%. This the rate for the first year of retirement. What about the second year and later? The withdrawal rate (lets denote this by w) is not a constant. It depends  on

  • the rate of inflation during retirement (i)
  • the rate of return on the corpus (r)
  • duration of retirement (k)

This is the formula connecting w,i,r and (feel free to ignore it if math nauseates you!)

eqIt is often assumed that the withdrawal rate for the second year will increase with inflation. That is if inflation is 8% then w(2nd year) = 2.4%X(1+8%) = 2.6% and so on. However this is not true and the above formula has to be used.

This is how the withdrawal rate typically looks for each year in retirement. The initial rate (for 1st year) is 3.5% in this example. (Click on the picture for a clearer view)

WSafe to say that the withdrawal rate changes with time in a complicated way! The point is, only the withdrawal rate for the 1st year in retirement or the initial withdrawal rate can be guessed (along with other  assumptions: at least two out of i, r and k). The withdrawal rate for subsequent years should not be guessed and has to be computed using the above formula.

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Here are some further insights about the initial withdrawal rate (Click the pictures for a clearer view)

W1How long the corpus lasts depends on whether returns can beat inflation or not. For a 4% initial withdrawal rate and 8% post-retirement inflation, if returns are 2% above inflation the corpus will for nearly 33 years. However if returns are 2% below inflation the corpus will last only for about 21 years. This will make a huge difference for a person who retires in his/her mid-50s.

W2Suppose we plan for 25 years in retirement and assume 8% post-retirement inflation, the initial withdrawal rate will range between 3-4% for returns between 6-8%.

W3Notice that the initial withdrawal rate decreases with increase in inflation. Counter-intuitive as this may seem it is due to the need for a higher corpus due to higher inflation.  Here again inflation rates between 6-8% correspond to withdrawal rates between 3.5-4.5% for a return of 7%

Inspired by Manish’s book I have reworked my online retirement calculator to output the withdrawal rate each year. Manish outlines 5 steps to calculate retirement corpus and I have modeled the calculator along these lines incorporating the first 4 steps (the last step is ‘where to invest’ and cannot be calculated!). You don’t need to read the book to use the calculator. However if you do need help in putting your financial life in order I strongly recommend buying the book and following the all the steps.

Download the Withdrawal Rate based Retirement Calculator

(please note: the mathematics remains the same for all retirement calculators and can be rewritten depending on what you wish to see as output.)

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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  1. Great tool. Thanks. One suggestion, would be to also highlight how much deficit there is – in the event of (monthly income – monthly expense ) < amount to be saved per month. This will help to plan for a change in career, a side income etc.

    1. Thanks Vandhana. If this happens and it does for most people (incl. me!) the first things to do is to
      1. alter lifestyle (if at all possible)
      2. change investment strategy
      This should help to a certain extent. If there is still a deficit, finding it boils down to a mental calculation in most cases.
      I can put in this calc in the file but it becomes a bit of a dampener!

  2. yes, it is a dampener, but it is also a reality check ! My biggest grouse with any retirement calculator is the fact that mentally it is difficult to wrap your head around the fact that 25 – 30 yrs down the line, you would need several crores to just sustain a middle-class lifestyle !

    1. Unfortunately mathematics is absolute. If the inputs are reasonable the output is a close representation of reality. I am working on ways to reduce the corpus. Will post that soon.

  3. Hello Puttu Sir,

    Nice to find a great website. I am truly impressed with the huge range of useful financial calculators on your website. Some of them, like the one on Retirement Withdrawl Rate mentioned in this post, can really matter a lot in the finanicial planning for average persons.

    Subscribing to your feed.

    1. Hi,

      Thanks. Your website is pretty impressive. I will look at the calculators in details. I have stayed away from loan calculation so far. perhaps I will simply provide a link to your site in my ‘resources’ page.

        1. Hi Ashal,
          Are you the same Ashal, who is so popular on JagoInvestor forum. If yes, then let me say that I really have admired your in-depth knowldge and enthusiasm to help people by clarifying their queries. There are lots of people in this world who are accomplished with a lot of knowldge but very few of them are ready to share their knowldge with full sincerity and passion that too without asking anything in return.
          I salute you for the same.
          And welcome you to visit http://locancalculators.in. Just trying to improve the things here.

    1. Dear Laoncalcs, Yes I’m the same Ashal. Thanks for the praising words. I’m still learning the tricks of the game called Personal Finance & trying to improve myself. In the process, getting the benefit of helping others as each new query gives me something to think up on & thus it’s the me who is extracting the most juice from my interactions with others on JI Forum. 🙂



  4. Dear Puttu Sir,
    Subra brings me here to use the calculator. We have worked together for Invest India (14 yrs back).

    I just used the calculator with my husband and happy to see that we are on track with regard to the mothly investment required for building the retirement corpus! I must say your calculator is indeed very useful!! Brilliant…

    Only queries are do we include LICS, ESOPS also in the amount invested so far?

    Pooja Jaisingh

  5. Hi Mr pattu!
    I have gone through this tool and find it very interesting.But i have a suggestion on accumulation phase:
    (1) In addition to SIP option can u please provide for one time investment or partly one time investment and the balance through SIP.
    (2) Inputting the retirement corpus before the retirement only(Accumulation already taken care of)
    Thanks for your wonderful work and response

    1. Dear Sir,

      Thank you for your feedback. I will implement them soon and send them to you.
      (1) is easy to do. (2) will be more interesting.

  6. Nice calculator Pattu and a very good article . And Thanks for mentioning about my book 🙂 . Retirement is indeed one thing people have to put on top priority atleast now in this era .


  7. Sir, I had a confusion regarding this calculator.
    There is a box "Annual increase in monthly investment you can manage". Is it annual increase in monthly investment or monthly increase in monthly/annual investment? I am asking because when I am putting 4/5% as value, it is returning almost double of what I am getting at 8-10% . I am required to invest 42k annually at the rate of increasing my monthly investment by 4% every year. And I am required to invest 20k annually at the rate of increasing my monthly investment by 10% every year. Why such a drastic change?

  8. Dear Pattu,
    I like what you create to help others. Great Service !
    I need help in planning.
    I am already retired (laid off) and just entered 69th year of my life. I need help in planning my finances. I am at present a USA citizen unemployed/retired and (my wife and I) live with our son in California. At some point I want to move out and live in my own property.
    My income is $24000 per year from rental and social security ( will become 36000, next year after my wife gets her social security). My expenses while living with my son (free board and lodging) are around $21500 per year ( maintaining two cars, travels, gifts, medical etc).
    I have a pension of Rs. 43000/ after TDS per month in India (which gets collected in SBI account). I have assets (real estate) worth 5 crores(before tax) in India, which I am trying to dispose but will take some time.
    I have to sell my assets in India and move everything to USA as I want to be in same town with my children, yet don’t want to be a burden on them. I have just returned from India as I could not sell anything where the payments are not entirely by cheque. I shall wait for some more time till I get a cheque payment,then pay 30% taxes and bring everything to USA.

    I am a diabetic for the last 20 years and my wife is suffering from hypertension.
    Do you have calculator for post retirement to suit my needs?
    Kindly help.



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