What Should Be Your Retirement Withdrawal Rate?

Published on / By M. Pattabiraman Twitter: @pattufreefincal / 27 Comments

Published: March 17, 2013 at 11:06 am

Last Updated on December 18, 2021

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’.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!


    🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

    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 k (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.

    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.)

    Do share this article with your friends using the buttons below.
    🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥
    Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
    New Tool! => Track your mutual funds and stocks investments with this Google Sheet!
    • Follow us on Google News.
    • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
    • Join our YouTube Community and explore more than 1000 videos!
    • Have a question? Subscribe to our newsletter with this form.
    • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
    Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!


      Explore the site! Search among our 2000+ articles for information and insight!

      About The Author

      Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
      Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
      Our new course!  Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
      Our new book for kids: “Chinchu gets a superpower!” is now available!
      Both boy and girl version covers of Chinchu gets a superpower
      Both boy and girl version covers of Chinchu gets a superpower.
      Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
      Feedback from a young reader after reading Chinchu gets a Superpower (small version)
      Feedback from a young reader after reading Chinchu gets a Superpower!
      Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
      Buy the book: Chinchu gets a superpower for your child!
      How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
      Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
      We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
      About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
      Connect with us on social media
      Our publications

      You Can Be Rich Too with Goal-Based Investing

      You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
      Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

      Your Ultimate Guide to Travel

      Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)