The 4% rule for retirement, worked out for India
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What the rule says
| Year | Spending | How it is worked out |
|---|---|---|
| 1 | ₹4,00,000 | 4% of ₹1 crore |
| 2 | ₹4,24,000 | ₹4,00,000 + 6% |
| 3 | ₹4,49,440 | ₹4,24,000 + 6% |
| 25 | about ₹16,20,000 | ₹4,00,000 grown at 6% for 24 years |
The 4% applies only to the first year. After that the spending follows prices, not the balance, so the share of the remaining savings being spent drifts up or down as markets move.
Two things often get lost when the rule is repeated. It is not “4% of whatever the balance is each year”, which can never run out but makes spending swing with the market. And 4% is not a return: it is a spending rate.
Where it came from
A US financial planner, William Bengen, tested every 30-year retirement that started from the 1920s onward using US share and bond returns. For each starting year he found the highest first-year withdrawal that survived 30 years. The lowest of those, for someone retiring into the high inflation of the late 1960s, was a little above 4%. A later study from Trinity University (1998) tested other mixes and periods and became the source of the “4% rule” name.
| What the study assumed | Why it matters |
|---|---|
| US share and bond returns, one of the strongest markets of the 20th century | Other markets had worse runs |
| US inflation, about 3% a year on average | Indian inflation has run higher |
| Retirement of 30 years | Retiring at 55 or living past 90 needs longer |
| Roughly half or more in shares, the rest in bonds | A different mix gives a different result |
| No fund costs or taxes | Both come out of the return |
| Spending never adjusted after bad years | Real people often trim spending |
The rule describes what would have survived in one country's past. It is not a promise about any future period.
The arithmetic underneath
A 9% return with 6% inflation is a real return of about 2.8%, not 3%. Because spending rises with inflation, only the real return helps the money last. The table shows the highest first-year rate that lasts a given number of years if the real return were the same every single year.
| Real return each year | Lasts 25 years | Lasts 30 years | Lasts 40 years |
|---|---|---|---|
| 0% | 4.0% | 3.3% | 2.5% |
| 1% | 4.5% | 3.8% | 3.0% |
| 2% | 5.0% | 4.4% | 3.6% |
| 3% | 5.6% | 5.0% | 4.2% |
| 4% | 6.2% | 5.6% | 4.9% |
Two patterns stand out. A longer retirement lowers the rate a lot more than most people expect. And a steady real return of about 2% supports roughly 4.4% for 30 years, which is close to the rule. Real years are not steady, which is why the historical studies arrived at a lower number than this table suggests for the same average.
How long would it last?
Change the amounts and the assumptions. The chart shows the balance in rupees of each year and in today's rupees.
Why the order of returns matters
₹1 crore at the start. All three paths have the same 30 yearly returns, which compound to the same total as 9% a year; only the order differs. With withdrawals, spending starts at ₹5 lakh and rises 6% a year.
With money going out every year, losses early on are locked in: shares sold low to fund spending are not there for the recovery.
Switch the withdrawals off and the three paths end at exactly the same amount. Switch them on and they split apart. The reason: in the bad-years-first path, spending is paid by selling investments after they have fallen, so more units are sold to raise the same rupees, and those units miss the later recovery.
This is why the first five to ten years of a withdrawal plan carry most of the risk, and why retirement plans often talk about keeping a few years of spending in steadier assets.
Applying it in India
- Inflation. Indian consumer prices have risen faster than US prices over most decades. A higher inflation rate only matters through the real return, so what counts is whether returns ran correspondingly higher.
- Length. Retiring at 58 or 60 and living into the 90s means 30 to 35 years. Retiring at 45 can mean 45 years or more.
- Health costs. Medical costs have tended to rise faster than general inflation, and they rise with age, so spending in later years is often higher, not flat.
- Other income. A pension, an annuity, rent or EPS payments cover part of the spending, so only the gap needs to come from savings.
- Tax and costs. Fund expense ratios and tax on gains are paid out of the return. See what investing costs.
What changes the answer
| Change | Effect on a sustainable first-year rate |
|---|---|
| Longer retirement | Lower |
| Higher inflation with the same return | Lower |
| Bad years arriving early | Lower |
| Higher fund costs or tax | Lower |
| Willingness to cut spending after a bad year | Higher |
| A pension or rent covering part of the spending | Higher, on the savings part |
| Leaving nothing at the end vs leaving the full amount | Higher if nothing needs to be left |
What to check next
- Is the figure being quoted a spending rate (4% of the starting amount) or a return? They are often confused.
- Which inflation rate, and which length of retirement, does the example assume?
- Does it allow for a fall in the first few years, or only a smooth average?
- Are fund costs and tax included?
- How will the money actually be drawn? See how a systematic withdrawal plan works, and how the mix of investments changes the ride.
Retirement planning depends on your own income, health, family and tax position. For a plan, consult a SEBI-registered investment adviser.
Educational explanations only, not investment advice, research or a recommendation to buy, sell or hold any security. Past performance does not indicate future results. Every example uses made-up round numbers. Read the Disclaimer before relying on any figure.