Why the 4% Rule May Not Work for Your Retirement in India
Early retirement is a dream for many professionals in India. The idea of Financial Independence, Retire Early (FIRE) has gained massive popularity, allowing people to pursue their passions without worrying about a monthly paycheck. However, the biggest challenge is figuring out exactly how much money you need to retire without ever running out.
Many experts suggest using the “4% Rule” to calculate this amount. While this is a popular benchmark, factors like high inflation and longer life expectancy in India could make this plan risky.
What is the 4% Rule for Retirement?
This rule was created by American financial adviser Bill Bengen in 1994. It offers a simple way to estimate your retirement fund. According to the rule, you can safely withdraw 4% of your total savings in the first year of retirement. In the following years, you adjust that amount slightly to keep up with inflation.
Essentially, the rule suggests you need a corpus that is 25 times your annual expenses. For example, if you spend ₹10 lakh a year, you would need ₹2.5 crore. Traditionally, this strategy is designed to make your money last for about 30 years.
The 4% Rule in the Indian Context
While the “25x rule” is a common starting point, it may not be enough for retirees in India. Let’s look at an example:
Suppose you want a monthly income of ₹1 lakh after you retire. Using the 4% rule, you would need a total corpus of ₹3 crore (₹12 lakh per year multiplied by 25).
However, this math often fails in India for a few key reasons:
- Higher Inflation: The 4% rule is based on US inflation rates of 2 to 3%. In India, inflation usually stays around 5 to 6%.
- Rising Costs: Healthcare and lifestyle expenses are increasing rapidly in India, meaning you will likely need more money each year than you originally planned.
If you start by withdrawing ₹12 lakh in your first year and inflation is at 6%, you would need ₹12.72 lakh in the second year and ₹13.48 lakh in the third. Even if your investments grow at 7% per year, a ₹3 crore fund might only last about 29 years. For an early retiree, this is a major risk.
Why Indian Investors Should Be Cautious
The 4% rule was designed for the US economy, which has lower inflation and stronger social security systems. In India, things are different:
- Lack of Social Security: India does not have the same universal financial support systems for retirees that exist in the West.
- Longer Life Expectancy: As healthcare improves, people are living much longer. If you retire at 45, your money might need to last 40 or 50 years, not just 30.
- The Inflation Gap: High inflation eats away at your purchasing power much faster in a developing economy.
Final Thoughts
Early retirement requires careful planning that fits the specific economic conditions in India. Relying solely on the 4% rule could leave you short of funds in your later years. It is often safer to aim for a larger corpus perhaps 30x or 40x your annual expenses to ensure you stay financially secure throughout your entire retirement.
Also Read : Government Eyes ₹16.7 Lakh Crore in Infrastructure Funding via NMP 2.0
