Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

Computing the Safe Withdrawal Rate for a Retirement

Portfolio in India

Ravi Saraogi, CFA*

August 2022

Abstract
Estimating a rate of withdrawal for a retirement portfolio that will not lead to its premature exhaustion is one
of the key questions that besieges a retirement planner. This rate is commonly referred to as the Safe
Withdrawal Rate (SWR). Following a landmark study by Bengen (1994), the most widely used SWR is 4 percent-
however, this SWR pertains to the financial markets in the United States. There has been no systematic study
on what the SWR is for India. This study is an attempt to fill this important lacuna.

Estimating a suitable SWR for the Indian financial markets in challenging. Compared to the more developed
financial markets, the Indian markets are young. This presents two problems. First, there is limited historical
data to work with, and second, the data present is not stationary, i.e., it exhibits structural changes across
different time periods. Accordingly, this study estimates the SWR for India using both the original approach
used in Bengen (1994) and simulation on adjusted data.

The study finds that there is limited applicability of the 4 percent SWR in India. While a cursory data
examination suggests that the globally acclaimed SWR of 4 percent meets Indian requirements as well, this
conclusion falls through once we take into consideration falling asset return in India. A more robust
computation shows that the SWR for India is lower than 4 percent. For an average Indian investor, a SWR of 3
percent is suitable, and for a risk-conservative investor, it should be no more than 2.6 percent.

JEL: G10, G11, G12, G17, G50

Keywords: safe withdrawal rate, India, retirement planning, personal finance, investing

*
Ravi Saraogi, CFA is a SEBI Registered Investment Adviser (RIA) and co-founder of Samasthiti Advisors. He is based out
of Chennai, India, and can be reached at ravi.saraogi@samasthiti.in

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

1. Introduction
A pertinent question in financial planning is how much can be safely withdrawn from a retirement
corpus without exhausting it prematurely. In common literature, this withdrawal rate is referred to
as the Safe Withdrawal Rate (SWR). The most common SWR used is 4 percent. It is conventional
wisdom that if the withdrawal rate from your retirement corpus does not exceed 4 percent, you can
safely expect your retirement corpus to outlast you. In the absence of anything better, this heuristic
has been elevated as a rule in retirement planning.
The origin of this 4 percent rule can be traced back to Bengen (1994)1. In this seminal study, the author
looked at data for financial markets in the United States (US) and arrived at an acceptable withdrawal
rate of 4 percent for retirement portfolios. As this study was based on data for the US markets, its
applicability is also restricted to the US. Another popular research on this topic is the “Trinity Study”2
that refers to a study in 1998 by three professors at the Trinity University. This study broadly concurs
that a SWR of 3-4 percent is unlikely to prematurely exhaust a retirement portfolio.
In the absence of research on other geographies, there is a tendency to borrow the 4 percent rule for
other geographies as well. While personal finance practitioners have commented on the applicability
of the 4 percent rule to India, there has been no systematic study in trying to answer what the SWR
should be for the Indian markets. The existing literature on the topic of an India-specific SWR is
restricted to sporadic commentaries 3 4 which are critical of using a SWR derived from markets in
foreign geographies and applying the same to the Indian case.
This study seeks to fill the gap in trying to answer what the SWR should be for India. The author
believes this is the first attempt in arriving at a detailed study on an India-specific SWR that can assist
practitioners in retirement planning.
The subsequent section of the study describes the background. The third and fourth section describe
the data and the methodology respectively. In the fifth section, we have provided the output, followed
by the interpretation in the subsequent section. To add to the robustness of the study, we have
repeated the methodology on adjusted data from the seventh to the ninth section. In the final section,
we end our study with the conclusion.

2. Background
The SWR is that withdrawal rate from which ensures that a retirement portfolio does not exhaust
itself prematurely. It is important to note that the SWR is the rate of withdrawal in the first year of
retirement. For the subsequent retirement years, the withdrawal from a retirement portfolio is arrived
at by applying a rate of inflation on the first year’s withdrawal amount.
As an example, let’s assume that an individual has accumulated a retirement corpus of INR 1 crores
at the age of 60. If the individual uses SWR of 4 percent, she will withdraw an annual sum of INR 4
lakhs in her first year of retirement. In the subsequent year, assuming an inflation rate of 10 percent,
she will withdraw INR 4.4 lakhs in her second year of retirement, and so on. Her chosen rate of 4
percent withdrawal in the first year of retirement, and then an inflation-adjusted withdrawal every
subsequent year can be classified as “safe” is she does not exhaust her retirement corpus till her life
expectancy.
The computation of a SWR that can be used widely is complicated due to one of the most underrated
risks in retirement planning - the sequence of return (“SOR”) risk. The SOR risk refers to the fact that
the value of a portfolio is not only dependent on the average return it earns, but also on the sequence
of returns. Two portfolios, both earning an average return of 7 percent, will have different terminal
values depending on the sequence of periodic returns that led to the average.

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

As an illustration, in Table 1, we have compared the terminal value of two portfolios which earn the
same average return of 7 percent, but in different sequence (the return earned by Portfolio 2 is in the
reverse sequence of the return earned by Portfolio 1). This difference in sequence of returns is enough
to lead to a more than 10 percent gap in the ending value of the two portfolios in only 5 years. For
retirement planning, which involves a couple of decades, the difference in terminal value due to
sequence of return can be overwhelming.
Table 1: Difference in portfolio terminal value due to difference in sequence of return
Portfolio 1 Portfolio 2

Year
Portfolio Opening Closing Portfolio Opening Closing
Income Expenditure Income Expenditure
Return Value Value Return Value Value

Year 0 100.0 100.0

Year 1 18.0% 100.0 18.0 -5.0 113.0 -15.0% 100.0 -15.0 -5.0 80.0
Year 2 14.0% 113.0 15.8 -5.0 123.8 -7.0% 80.0 -5.6 -5.0 69.4
Year 3 25.0% 123.8 31.0 -5.0 149.8 25.0% 69.4 17.4 -5.0 81.8
Year 4 -7.0% 149.8 -10.5 -5.0 134.3 14.0% 81.8 11.4 -5.0 88.2
Year 5 -15.0% 134.3 -20.1 -5.0 109.1 18.0% 88.2 15.9 -5.0 99.1

Avg. Avg.
Return 7.0% Return 7.0%
Source: Author calculations

To further understand the importance of SOR risk in retirement planning, let’s take an example where
we are required to suggest the withdrawal strategy to a retiree at age 60. The retiree would like her
retirement corpus to last till the age of 90 years and expects her expenditure to inflate at 6 percent
each year. As per historical return data, the retirement planner projects average debt return at 5
percent and average equity return at 12 percent during the retiree’s retirement years.
Based on the above configuration, the retirement planner suggests a SWR of 4 percent. Based on
averages, this SWR would indeed be prudent. As is depicted in Figure 1, staring with a corpus of 100,
and withdrawing 4 in the first year (and an inflation adjusted withdrawal each subsequent year), the
retirement corpus lasts for the full retirement period of 30 years.
Figure 1: Retirement corpus glide-path without SOR

140 2.5

120
2.0
100

1.5
80

60
1.0

40
0.5
20

0 0.0
2021

2039
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038

2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051

Retirement Corpus (Start = 100) Monthly Income (RHS) Monthly Expenditure (RHS)

Source: Author calculations

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

Where things go awry is that return in a portfolio is seldom earned linearly as averages would suggest.
Someone retiring in the year 1992 in India would witness three very different decades of equity
returns. In the first ten years of her retirement (1992-2002), the equity returns as measured by Sensex
would be a disappointing 5.5 percent. In the next ten years (2002-2012), disappointment would turn
to delirium with the equity markets delivering a return of over 17 percent. In the final decade of
retirement, the equity returns would be a good 12 percent.
The average returns for the 30-year period (1992-2021) would be 12 percent, and based on averages,
the SWR of 4 percent would seem appropriate. However, if the retiree follows the planners advise and
maintains this SWR, she will run out of money by the age of 85, as depicted in Figure 2.
Figure 2: Retirement corpus glide-path with SOR

120 2.5

100 2.0

1.5
80
1.0
60
0.5
40
0.0

20 -0.5

0 -1.0
2021

2033

2045
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032

2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044

2046
2047
2048
2049
2050
2051
Retirement Corpus (Start = 100) Monthly Income (RHS) Monthly Expenditure (RHS)

Source: Author calculations

Introducing even a decadal variation in average returns is enough to cause the retirement corpus to
fall short by 5 years. In reality, the risk of the retirement corpus exhausting itself before the assumed
life expectancy will be even more severe if we introduce monthly or yearly variation in average returns.

3. Data Description
For the purpose of this study, we have considered two asset classes – equity and debt. For imputing
equity returns, we have taken the oldest available stock market index in India, the BSE S&P Sensex
30 Index (“Sensex”). The daily price return values of Sensex are available from April 3, 1979 onwards
(Figure 3). Between April 1979 and April 2022, the Sensex has multiplied by more than 450 times,
delivering price returns of 15.4 percent CAGR. As is expected of equity investments, this return has
come on the back of substantial volatility, as is evident in the distribution of monthly Sensex returns
since 1979 (Figure 4).

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

Figure 3: S&P BSE Sensex Index Value Figure 4: Distribution of S&P BSE
Sensex Monthly Returns
70,000 37%
31%
60,000
50,000
40,000 16%

30,000 9%

20,000 3% 2%
1% 1% 1%
10,000

-24% to -18%

-18% to -11%

2% to 9%

16% to 22%

22% to 29%

29% to 35%
-11% to -4%

9% to 16%
-4% to 2%
0
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
Source: ICRA MFI Source: Author calculation
Note: Data is for the price return index

For the debt market, there is no comparable index like the Sensex which can be used for imputing
returns from debt investments. Given the slow development of debt capital markets in India, it is
challenging to arrive at a single indicator to impute debt returns from 1979 onwards. Hence, we have
combined two data series. First is the deposit rates in India (1-3 years) for the period 1979 to 1995.
From 1995 onwards, we have used the returns of Aditya Birla Sun Life Liquid Fund (which is one of
the oldest debt mutual fund schemes in India) for imputing debt returns. Two considerations have
been kept in mind while selecting the above data. First is to minimize the influence of interest rate
risk in the debt return data, which is why data for short-term debt products have been used. Second
is to minimize the impact of credit risk while imputing debt returns – both the data series identified
for debt returns carry negligible credit risk.
Compared to equity investments, the return data for investing in a debt product shows substantially
lower volatility. This is as expected, particularly for debt products which also carry low interest rate
risk and low credit risk. Based on the return data for deposit rates (1-3 years) and the Aditya Birla Sun
Life Liquid Fund, the constructed debt index (Figure 5) has delivered a return of 8.1 percent CAGR.
Figure 5: Constructed Debt Index Value Figure 6: Distribution of Debt Monthly
Returns
3,000 27%
25%
2,500

2,000 14%
12%
1,500 8%
6% 5%
3%
1,000 0% 0%

500
0.0% to 0.1%

0.1% to 0.2%

0.2% to 0.3%

0.3% to 0.4%

0.4% to 0.5%

0.5% to 0.6%

0.6% to 0.7%

0.7% to 0.8%

0.8% to 0.9%

0.9% to 1.0%

0
1979
1981
1984
1986
1988
1991
1993
1995
1998
2000
2002
2005
2007
2009
2012
2014
2016
2019
2021

Source: Author calculation, RBI, ICRA MFI Source: Author calculation

4. Methodology
The methodology we have adopted is similar to the approach taken by Bengen (1994). It has been
assumed that the retiree retires at the age of 60 and the retirement corpus should fund the retiree’s
expenses till the age of 90, i.e., for a period of 30 years. Starting from the year 1980, we have looked

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

at all such possible 30-year retirement periods, which we refer to as Retirement Paths. The first
Retirement Path starts in 1980 and ends 30 years later in 2010. The second Retirement Path starts at
1981 and ends 30 years later in 2011, and so on. There are twelve such Retirement Paths starting from
1980-2010 going up to 1991-2021. For these twelve Retirement Paths, actual market return data for
equity and debt can be used.
To increase the sample size, we have also included Retirement Paths going up to 2006-2036. The
equity and debt return data for the period exceeding 2021 has been projected. It has been ensured
that for out-of-sample Retirement Paths, the number of years for which actual data has been used
exceed the number of years for which projected data has been used. For instance, the last Retirement
Path of 2006-2036 has 16 years for which actual market return data can be used (2006-2021) and 15
years for which projected market return data has been used. For a visual depiction of the Retirement
Paths, please refer to Annexure 1.
The retirement corpus starts at a base of 100, with an asset allocation mix of 40 percent in equity and
60 percent in debt. To ensure that the analysis is synchronous, all additions/reductions in the
retirement corpus happen on a monthly basis. The retirement corpus accrues income every month, a
withdrawal is made from the corpus every month, and re-balancing of the corpus (to bring it back to
its 40:60 equity to debt mix) also happens on a monthly frequency. The analysis ignores transaction
costs and taxes.

5. Output
Each Retirement Path is set-up with the above configuration and actual equity and debt return data
is used to simulate the retirement corpus. For every Retirement Path, a SWR is arrived at such that
the retirement corpus falls to zero only in the last month of the retirement period. Below is the SWR
for each of the Retirement Paths.
Figure 7: Safe Withdrawal Rates
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1985-2015

2002-2032
1980-2010
1981-2011
1982-2012
1983-2013
1984-2014

1986-2016
1987-2017
1988-2018
1989-2019
1990-2020
1991-2021
1992-2022
1993-2023
1994-2024
1995-2025
1996-2026
1997-2027
1998-2028
1999-2029
2000-2030
2001-2031

2003-2033
2004-2034
2005-2035
2006-2036

Source: Author calculations

The SWR range starts from a minimum of 4.7 percent and goes up to maximum of 9.4 percent. This
wide range displays a declining trend as is evident from the linear trend line fitted on Figure 7. Clearly,
SWR in India has been falling consistently. The SWR averaged 8.6% for retirees starting their
retirement during the period 1980-1988, fell to 6.3% for retirees starting their retirement in the
period 1989-1997 and declined further to 5.5% for those retiring during the period 1998-2006.

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

The reason for the continuous decline in SWR is the fall in investment return – for both equity and
debt investments. The SWRs obtained are a direct function of the monthly returns earned by the
equity and the debt component of the retirement corpus- and both these returns have been showing
a fall (see Figure 8 and Figure 9).
Figure 8: Average Monthly Sensex Return Figure 9: Average Monthly Debt Return

2.1% 0.8%
1.8% 0.7%

1.5% 0.6%
0.5%
1.2%
0.4%
0.9%
0.3%
0.6%
0.2%
0.3% 0.1%
0.0% 0.0%
1980-2010

1982-2012

1984-2014

1986-2016

1988-2018

1990-2020

1992-2022

1994-2024

1996-2026

1998-2028

2000-2030

2002-2032

2004-2034

2006-2036

1980-2010

1982-2012

1984-2014

1986-2016

1988-2018

1990-2020

1992-2022

1994-2024

1996-2026

1998-2028

2000-2030

2002-2032

2004-2034

2006-2036
Source: ICRA MFI, Author calculation Source: Author calculation
Note: Data is for the price return index

6. Interpretation of the Result

What do we make of the results presented above? On a cursory look, the historical data suggests that
the 4 percent rule remains valid for the case of India. In none of the Retirement Paths does the SWR
fall below 4 percent. The lowest SWR in our analysis above is 4.7 percent. Thus, based on the results
of the above analysis alone, a planner would be correct in suggesting an investor to withdraw not more
than 4 percent from their retirement corpus.
However, this inference would suffer from a key problem – the analysis rests on asset price data which
shows falling return over time. We believe this fall in asset return (for both equity and debt) is
structural rather than transitory. This is because there is nothing unusual about falling asset yields.
For an emerging economy, which is growing from a small base, investment yields start elevated and
then falls as the economy matures. This is because, initially, investors demand higher compensation
for holding investment assets – both due to higher risk premium and higher inflation.
The persistent fall in long-term equity returns, as measured by the 15-year holding period for the
Sensex can be seen in Figure 10.
Figure 10: 15 year holding period for the Sensex
30%

25%

20%

15%

10%

5%

0%
1995

1999

2003

2007

2011

2015

2019
1994

1996
1997
1998

2000
2001
2002

2004
2005
2006

2008
2009
2010

2012
2013
2014

2016
2017
2018

2020
2021
2022

Source: ICRA MFI, Author calculation

Note: Data is for the price return index

7
 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

In the case of return from the debt markets, the fall in yield can be viewed from the perspective of
falling inflation. Inflation and yield in the debt market are closely related. To counter high inflation,
central banks increase benchmark interest rates, which gets transmitted to the broader debt market.
Thus, periods of high inflation are accompanied by high interest rates. Conversely, when inflation is
low, central banks lower benchmark interest rates to their normal levels, and hence low inflation is
accompanied by low interest rates. In the case of India as well, we can see this relationship in Figure
11.
Figure 11: Relationship between inflation and debt returns

10.5

9.0 9.1
8.2 8.5
7.5
7.1
6.3 6.2 6.3

1975-1980 1980-1990 1990-2000 2000-2010 2010-2020

Average Consumer Price Inflation (%) Average Debt Return (%)

Source: MOSPI, ICRA MFI, World Bank

Note: Data for inflation is for Consumer Price Inflation (CPI)

Since our computation of SWR in section 5 includes periods during which asset yields start out high,
and then decline continuously, our historical analysis overstates the SWR. This is because the high
asset yields which were part of our analysis may not be forthcoming in the future- particularly if we
believe that the fall in asset yields is structural and not transitory.
In the next section, we try and correct for this anomaly and arrive at an adjusted SWR which can be
used more reliably.

7. Adjustment of Data
To correct our analysis from the bias of high historical asset yields, we will need to adjust the return
assumptions downwards. Since falling return has been observed in both equity and debt, the
adjustment needs to be done for both data series. However, this is easier said than done as any
adjustment of data will involve making assumptions which are open to criticism. Below we describe
the procedure adopted in this study which we think serves our purpose the best.
For adjusting equity returns, we need to segment the equity returns data into two components – a
period that we can identify as high returns period, and a period we can identify as low returns period.
Post this segmentation, we can use the data only for the low returns period under the assumption that
future equity returns will fluctuation around this low return.
There are two straightforward ways of segmenting equity returns – one is to take the recent data for
a certain number of years and ignore the data significantly in the past. In our case, we have data for
Sensex returns from 1979 onwards, which translates to broadly 40 years of equity returns data. If we

8
 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

look at the decadal return provided by Sensex between 1980 to 2020, we see a clear break at the turn
of the century (in the year 2000) between a high-return period and a low-return period.
Figure 12: Sensex decadal growth

21% 21%

13%

9%

1980-1990 1990-2000 2000-2010 2010-2020

High Return Low Return
Source: ICRA MFI
Note: Data is for the price return index

In the period between 1980 to 2000, the Sensex delivered a CAGR of a little over 20 percent. Even if
we break the period of 1980-2000 into decadal averages, we see that the Sensex delivered over 20
percent return in each decade. Post 2000, however, the return profile of the Sensex shows a marked
downturn (this can be observed in the 15-year holding period return graph of the Sensex as well, refer
Figure 10). In the decade 2000-2010, the decadal return comes down to 13 percent, which further
compresses to 9 percent in 2010-2020. Thus, a case can be made to use Sensex data only post the
year 2000 for the purpose of our analysis. This would be a reasonable adjustment.
In the case of debt investments, the absence of a continuous index in India to track the performance
of debt markets makes it difficult to adopt the adjustment methodology used for equity returns.
However, what we do know in the case of debt investments is that its return is heavily dependent on
inflation. If we look at the decadal trend in inflation and interest rates (as measured by 1-3 year
deposit rates), we see periods of high inflation being characterised by high interest rates and vice-
versa. This is along expected lines.
Figure 13: Debt returns and inflation

10.3%

8.2% 8.2% 8.1%

7.2% 7.5%
6.2%
5.2%
3.9%
2.4%

1980-1990 1990-2000 2000-2010 2010-2020 2016-2020

High Return Low Return

Debt Returns - Decadal Inflation - Decadal

Source: RBI, ICRA MFI

9
 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

While inflation in India shows considerably volatility depending on local and global factors, the
overall trend has been that of decline. This corresponds with the general trend of global moderation
in inflation rates post the Second World War. The emergence of independent central banks with a
hawk-like vision on inflation has had an extraordinary success in containing inflation.
Our best bet on getting a handle on future returns from debt investments is to anchor the same to
inflation expectations. In 2016, India’s central bank, the Reserve Bank of India (RBI) adopted a
Flexible Inflation Targeting framework to guide its monetary policy. The target adopted for the first
five-year period of 2016-2021 was 4 percent with a +/- 2 percent deviation tolerance. If we assume
average long-term inflation at 4 percent, and a 1 percent real rate of return on debt investments, we
arrive at 5 percent as the expected long-term return from debt investments.
To summarize our results on the data adjustment– for equity, only data post the year 2000 has been
considered and for debt, the adjusted long term debt returns has been assumed as 5 percent.

8. Methodology for Adjusted Data

Identifying periods of high return from the Sensex data and excluding the same helps in adjusting
Sensex data to contemporary reality, but it creates another problem. Instead of having data on equity
returns for 40 years, we now have only 20 years equity return data, which means with the adjusted
data, we cannot extract even one full 30-year Retirement Path. Thus, the methodology adopted for
imputing SWR from adjusted data differs from our earlier methodology.
Due to truncation in the data for equity returns, we have relied on simulation to try and impute
adjusted SWR. For this purpose, we have used the 20-year equity return data for the period 2000-
2020 to derive the distribution of monthly Sensex returns and use this distribution to simulate Sensex
monthly returns.
Figure 14 gives us a visual indication that the monthly Sensex return follows a bell-curve normal
distribution shape. To check formally whether we can model the monthly Sensex return as a normal
distribution with a defined mean and variance, we have used the Kolmogorov-Smirnov test for
normality.
Null hypothesis H0: The sample follows a Normal distribution;
Alternative hypothesis Ha: The sample does not follow a Normal distribution

The results of this test have been re-produced below,

D 0.050
p-value (Two-tailed) 0.500
alpha 0.050

As the computed p-value is greater than the significance level alpha=0.05, one cannot reject the null
hypothesis H0. The estimated parameters (mean and variance) of the normal distribution that best
approximates the Sensex monthly return data for the period 2000-2022 has been given below,

Standard
Parameter Value
error
µ 0.011 0.004
sigma 0.065 0.003

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

Given below is a visual representation of the actual Sensex monthly return distribution for the period
2000-2022, and the estimated distribution based on the above parameters. As is observed and
expected, the actual distribution has a fatter tail than the fitted distribution.
Figure 14: Sensex Monthly Return – Actual Distribution vs fitted Normal
Distribution

Distribution - Actual Data Distribution - Estimated

42%
36%
30%
24%
18%
12%
6%
0%

0.18% to 0.24%

0.24% to 0.30%
-0.30% to -0.24%

-0.24% to -0.18%

-0.18% to -0.12%

-0.12% to -0.06%

-0.06% to 0.00%

0.00% to 0.06%

0.06% to 0.12%

0.12% to 0.18%
Source: Author computations
Note: Data is for the Sensex price return index for the period 2000-2022

9. Output form Adjusted Data

We generated ten thousand simulations based on the above configuration and arrived at the following
distribution of SWR based on adjusted return data. As expected, adjusting asset returns leads to a fall
in the range of expected SWRs. In our earlier analysis (based on non-adjusted data), SWRs ranged
from a low of 4.7 percent to a high of 9.4 percent. Output from adjusted asset returns shows that
SWRs range from a low of 2.6 percent to a high of 7.3 percent (based on the SWRs straddled between
the 95 percent confidence interval). The compression in SWR once we adjust asset yields is evident.
Figure 15: Distribution of SWR based on Adjusted Data
95% of the observations

19.8% 19.2%

15.4% 14.7%

9.3%
8.1%
5.5%
2.5% 2.8% 2.5%
1.4% to

2.6% to

3.1% to

3.7% to

4.3% to

4.9% to

5.5% to

6.1% to

6.7% to

7.3% to
10.7%
5.5%

6.7%
2.6%

3.1%

3.7%

4.3%

4.9%

6.1%

7.3%

Source: Author calculations

11
 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

The range of 2.6 percent to 7.3 percent for the 95 percent confidence interval is wide. If we take a cut-
off of 4 percent SWR, 35 percent of the observed SWRs are below this cut-off. The data makes it amply
clear that working with a 4 percent SWR for a retirement portfolio in India would not be prudent. If
we lower the cut-off of SWR to 3 percent, 8 percent of the observed SWRs are below this cut-off. For
a typical investor, this would represent a more appropriate SWR for their retirement portfolio. If we
further lower the cut-off to 2.6 percent, only 2.5 percent of the observed SWRs are below this
threshold. Even a risk-conservative investor will feel reassured that they will not outlast their
retirement corpus at a low SWR of 2.6 percent.

10. Conclusion
We started with a background of why the computation of a suitable safe withdrawal rate is critical for
retirement planning, and how there has been no systematic study of what this rate should be for India.
Given the challenges of looking at historical data for a young financial market like India, we have used
two methodologies to try and comprehensively estimate the local safe withdrawal rate. Our study
aptly highlights the danger of importing a safe withdrawal rate derived from another country’s
financial markets and using the same in the Indian context. Based on adjusted return data that
accounts for falling asset returns, the safe withdrawal rate for India is materially lower than the
conventional estimation of 4 percent- our study pegs the same at broadly 3 percent. Anything higher,
and we will put the safety of a retirement portfolio in jeopardy.

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

Annexure 1 – Visual depiction of retirement periods used in the analysis

Retirement
S.No. Age
Start Year
1 1980 60
2 1981 61 60
3 1982 62 61 60
4 1983 63 62 61 60
5 1984 64 63 62 61 60
6 1985 65 64 63 62 61 60
7 1986 66 65 64 63 62 61 60
8 1987 67 66 65 64 63 62 61 60
9 1988 68 67 66 65 64 63 62 61 60
10 1989 69 68 67 66 65 64 63 62 61 60
11 1990 70 69 68 67 66 65 64 63 62 61 60
12 1991 71 70 69 68 67 66 65 64 63 62 61 60
13 1992 72 71 70 69 68 67 66 65 64 63 62 61 60
14 1993 73 72 71 70 69 68 67 66 65 64 63 62 61 60
15 1994 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
16 1995 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
17 1996 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
18 1997 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
19 1998 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
20 1999 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
21 2000 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
22 2001 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
23 2002 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
24 2003 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
25 2004 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
26 2005 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
27 2006 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61 60
28 2007 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62 61
29 2008 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63 62
30 2009 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64 63
31 2010 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65 64
32 2011 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66 65
33 2012 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67 66
34 2013 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68 67
35 2014 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69 68
36 2015 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70 69
37 2016 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71 70
38 2017 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72 71
39 2018 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73 72
40 2019 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74 73
41 2020 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75 74
42 2021 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76 75
43 2022 90 89 88 87 86 85 84 83 82 81 80 79 78 77 76
44 2023 90 89 88 87 86 85 84 83 82 81 80 79 78 77
45 2024 90 89 88 87 86 85 84 83 82 81 80 79 78
46 2025 90 89 88 87 86 85 84 83 82 81 80 79
47 2026 90 89 88 87 86 85 84 83 82 81 80
48 2027 90 89 88 87 86 85 84 83 82 81
49 2028 90 89 88 87 86 85 84 83 82
50 2029 90 89 88 87 86 85 84 83
51 2030 90 89 88 87 86 85 84
52 2031 90 89 88 87 86 85
53 2032 90 89 88 87 86
54 2033 90 89 88 87
55 2034 90 89 88
56 2035 90 89
57 2036 90
*Shaded region highlights periods for which projected equity and debt return data has been used

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 Computing the Safe Withdrawal Rate for a Retirement Portfolio in India

References

1
Bengen, William P. (October 1994). "Determining Withdrawal Rates Using Historical Data" (PDF). Journal of Financial Planning:
14–24.
2
Cooley, Philip L.; Hubbard, Carl M.; Walz, Daniel T. (1998). "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable"
(PDF). AAII Journal. 10 (3): 16–21.
3
Pattabiraman, M. (February 2022). “Why we need to stop using Safe Withdrawal Rate (4% rule) for retirement planning”,
retrieved from https://freefincal.com/why-we-need-to-stop-using-safe-withdrawal-rate-4-rule-for-retirement-planning/
4
Dhirendra, Kumar. (June 2020). “What should be rate of withdrawal from savings to meet expenses after recruitment?”,
retrieved from https://economictimes.indiatimes.com/wealth/plan/what-should-be-rate-of-withdrawal-from-savings-to-meet-
expenses-after-retirement/articleshow/76230273.cms

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