Accumulating a substantial portion as retirement corpus is a huge milestone. However, it can become meaningful only if the corpus is managed judiciously, ensuring it lasts for at least three decades after your retirement.
4% retirement rule
One of the most widely recommended strategies by financial experts to achieve this goal is the strict, strategic application of the 4% retirement rule which shows approximately how much you can safely withdraw each year without depleting the corpus and going into deficit. The time-tested approach shows how disciplined withdrawals can avoid money shortfalls.
Origin of the rule
The orginins of the rule can be traced back to the early 1990s when U.S. financial planner William P. Bengen (Bill Bengen) wanted to determine a safe withdrawal rate for retirees after analysing U.S. stock and bond market data from 1926 to 1976.
After testing withdrawal scenarios multiple times, he concluded withdrawing 4% a year from a retirement portfolio could safely sustain a 30-year retirement window, without exhausting the corpus.
In 1998, a study, conducted by Trinity University professors, confirmed Mr. Bengen’s finding.
Portfolio suggestion
It’s important to note the rule works effectively only if certain criteria are met strictly. Mr. Bengen observed the composition of one’s retirement portfolio played a crucial role in ensuring the longevity of the corpus. He found a 50:50 split between equities (stocks) and bonds (debt instruments) provided an optimal balance between growth and stability.
While bonds gave stability, stocks offered the growth required to keep pace with inflation and sustain ongoing 4% regular withdrawals every year.
Interestingly, Mr. Bengen found holding very few equities in the retirement portfolio posed a higher risk to the longevity of the portfolio than having a slightly higher exposure to equities. This means, he suggested that equities played a key role in growing the corpus over time.
Mr. Bengen’s conclusions were influenced by three major economic setbacks of his time: Big Bang (1973-74 recession, marked by high inflation); Big Dipper (market slump from 1937-41); and the Little Dipper (the Great Depression). Now, let’s focus on the practical applicability of the rule.
Key assumptions
The rule assumes a 30-year retirement window and works best when the corpus is diversified across stocks and bonds/fixed-income investments. Further, it assumes retirees adjust withdrawals annually to account for inflation, to maintain lifestyle and sustain purchasing power capacity over time. It also relies on disciplined withdrawals, with retirees following the rule strictly. Large, unexpected expenses, such as medical emergencies, are not accounted for in the rule.
How it works
In the first year of retirement, you withdraw 4% of your total corpus. In the years that follow, you adjust this amount only for inflation, ensuring your purchasing power keeps pace with the rising prices.
Let’s understand this with an example. Suppose Sudha retires with an accumulated corpus of ₹2 crore and the average inflation rate is 7% per annum. To account for inflation, the previous year’s withdrawal amount is multiplied by 1.07 each year. So, if in the first year, Sudha withdraws ₹8,00,000 (4% of her ₹2 crore corpus), in the second year, she can withdraw ₹8,56,000 (₹8,00,000*1.07). In the third year, she can withdraw ₹9,15,920 (₹8,56,000*1.07). In the fourth year, she can withdraw ₹9,80,034 (₹9,15,920*1.07), so on and so forth.
Likewise, every year, she can withdraw the previous year’s withdrawn amount plus the inflation-adjusted 7%. If this withdrawing pattern is followed strictly, it ensures her income (withdrawing money) grows in line with rising prices and at the same time investments (initial retirement corpus) continue to work in the background. Of course, the 4% rule has its critics and some suggest adjusting the withdrawal rate by reducing it to 3% to extend the longevity of the corpus or increasing the rate to 5% to enhance lifestyle.
Still, the rule serves as a guiding framework in managing your corpus and securing a steady, inflation-adjusted income. Once you understand how it works, you can make small tweaks to align it with your goals.
(The writer is an NISM & CRISIL-certified Wealth Manager and certified in NISM’s Research Analyst module)
Published – October 06, 2025 06:04 am IST
