Retirement Withdrawal Strategies: How Much Can You Safely Withdraw?

Consider a retired couple sitting at their dining table, trying to figure out how to make their savings last through the rest of their lives. After years of building their savings through the Employees' Provident Fund, National Pension System, mutual funds, and other saving schemes, the focus has now shifted from building their savings to using them wisely. They want a strategy that will enable them to enjoy their retirement without constantly being worried about running out of money. So, how do they do it?

A good starting point for many retirees is the 4% rule, which generally lets you withdraw up to 4% of your retirement savings in the first year and every year thereafter after adjusting this amount for inflation.

To illustrate, assume you have built a retirement corpus of ₹1 crore. You could withdraw ₹4 lakh in the first year. This approach will make the savings last for at least 30 years, and that is what would be desirable in case one wants to guard against living longer than their money.

But that is not the sole rule one may stick to: the alternative is called the dynamic withdrawal strategy. You adjust your withdrawal amount according to how the markets are going. If the market is great, one may want to take a little more; if it is having bad years, he takes less in order not to draw down his money too fast. Such a strategy protects one's retirement savings and offers flexibility during times of high volatility in the market. The bucket approach, on the other hand, has broken your retirement savings into three "buckets." The first would be your short-term needs of cash or short-term bonds that will cover your living expenses for the next 1-2 years. The second bucket is for medium-term needs and holds conservative investments that would provide income for the next 3-7 years. The third bucket is for long-term growth, invested in equities that are expected to grow over time and replenish the other buckets. In this way, you won't have to sell your stocks during a market downturn and thus lock in losses.

For mutual fund investors, the alternative is a Systematic Withdrawal Plan or SWP. With an SWP, a series of regular withdrawals could be set up from your mutual funds to provide a regular stream of income and allow the remaining investments to continue growing. One of the strong features that makes SWPs attractive is flexibility: you have complete discretion on the amount you need and the periodicity.

This may also be more tax-efficient, as each withdrawal contains both principal and capital gain, thus reducing one's overall tax burden.

But you need to consider some of the risks involved in withdrawing money from an investment, at least during that market downturn. It's what's termed the sequence-of-returns risk-perhaps better described as how the sequence can impact portfolio longevity. This can be diversified by keeping 2-3 years of expenses in stable, low-risk assets like fixed deposits or savings accounts. In this way, you will not have to withdraw from your equity investments when the market is down, and you can give it time to recover.

Most retirees in India depend a lot on traditional products like EPF and PPF. If you are one of them, you should plan for the withdrawals efficiently. Rather than taking one-time lump sum amounts from your EPF account, set up a recurring deposit or an SWP to spread your money over time. Under PPF, you get tax-free withdrawals after 15 years. So, this could prove to be an excellent option for regular tax-efficient income.

If you have invested in NPS, then you must know that you have to invest 40% of your corpus in an annuity that will provide you with a monthly income. Annuities are secure, but they don't always keep pace with inflation. Make sure to check out various annuity options matching your risk appetite and requirements for income.

Whatever withdrawal method you choose, there will be some things that you should consider. Inflation can be one of the largest long-term risks to your retirement money, meaning you would need to increase withdrawals enough to account for the rise in the cost of living. Another factor to consider seriously is your healthcare since the costs keep going up as you grow older. You are supposed to make provisions in your portfolio for this through liquid funds or health insurance.

The key to a successful retirement is that this plan has been reviewed regularly and adjustments have been made in light of that. Pay close attention to inflation, the state of the market, and changes in your lifestyle that continue to evolve; adjust the strategy. It is a good thing to consult a financial advisor who could help one stay on the right track whenever needs or circumstances change. The reason this selection of an appropriate withdrawal strategy at retirement is important is that one wants to ensure the sustainability of his or her savings for an extended period of life at old age.

Conclusion

The core idea of either following a 4% rule, using dynamic withdrawals, or even investing money in an SWP which would provide an income over perhaps twenty-five years, makes every penny work even when time is no longer yours: in your golden years of life.

In the next chapter, we are going into pension plans and annuities, which are an indispensable cog in the wheel toward leading a decent life of consistent income in retirement years.