How Much Should Retirees Withdraw?

Home »  Magazine »  How Much Should Retirees Withdraw?
How Much Should Retirees Withdraw?
A long recessionary period will hurt retirees everywhere. Their risk of running out of money will increase in particularly difficult times
Nilanjan Dey - 30 November 2022

Retirees can learn a lesson or two from The Godfather. They must keep their investments (friends) close, but their withdrawals (enemies) closer. The famous friends-and-enemies analogy, captured so evocatively in Mario Puzo’s seminal novel, resonates loudly in the corridors of retirement planning.

Withdrawals, however, present an unsettling quandary for the average retiree. Is there an ideal rate of withdrawal? What should be my rate? Is it too divergent from what is normally admissible? While such posers are asked commonly, universally acceptable answers have remained elusive. Despite endless discussions on optimum rates, retirement strategists have generally failed to identify a workable consensus.

Retirement savings collected over a lifetime must be leveraged when active income earners stop receiving salaries or profits from businesses. Retirees must then bravely face the inevitable issue—a withdrawal regime must be worked out to sustain one’s livelihood once superannuation happens.

The question of ideal withdrawal, thus, assumes great significance. This becomes particularly important in the context of elevated inflation. Some sections advise the average retiree to try the 4 per cent rule, especially during the first few years. In other words, no more than 4 per cent should be taken out of the retirement corpus annually. This straight suggestion, I believe, is somewhat over-simplified and does not really hold water in the long run.

Withdrawal rate, as derived by individual choice, may instead vary widely. Factors like price rise and taxation play their roles on this front. At the same time, the performance of retirement plans also becomes important. Performance, determined by the market, may keep changing in tune with macro conditions, like government policies.

The Challenge

Arriving at the most optimum drawdown rate has remained challenging. Spending levels hardly stay static throughout retirement. In the practical world, retirees often pay more for normal services (such as health insurance) as they age. Medical emergencies frequently eat into their savings, as well. Sudden and unforeseen expenses are quite common, too. This may spell bad news for the average individuals, who may deplete their resources after a stretch of time.

Shortfalls happen all the time—more so in a country like India, where retirement preparedness (even during active income-earning years) is generally poor. The common man is, typically, late to arrive on the scene. Retirement-oriented savings are inadequate. Awareness is generally wanting; most Indians do not start early enough. Methodical saving regimens are rarely followed. In fact, a sizeable section of the populace is dependent heavily on the government for pension and old-age social security. The penetration of contemporary and organised pension systems is quite low when compared with what is evident in the western economies.

The challenge also manifests itself sharply when investment performance turns for the worse. For a retirement plan focused on fixed-income securities, the challenge is even more pronounced. As things stand, debt assets will hardly cover the effect of inflation, not to mention the impact of taxes. Risks appear before the retiree in the shape of poor credit quality and adverse interest rate movements. Equity and commodity, however, will potentially earn significantly more than debt during certain phases of the market. Yet, these assets are volatile by nature. Too much dependence on risky allocations may well undermine the ordinary retiree’s interests.

What is the most optimum allocation? This question cannot be answered right away, and the ordinary retirees have to evaluate their choices carefully before arriving at an answer. Whether an individual is conservative or aggressive, a well spread-out and diversified portfolio is generally recommended. Wise retirees will also want sufficient liquidity.

The Solution

The solution for average retirees stems from their understanding of the cost of living index. Consumer price inflation (more than 6 per cent at this juncture) is the key metric to watch out for. The withdrawal strategy must be adjusted accordingly. The simplest way of doing so is to increase the rate of withdrawal in keeping with the inflationary trend. In other words, if inflation is 6 per cent in 2022, the individual may increase the rate proportionately in 2023.

For most people, however, such a solution will be riddled with imperfections. With higher longevity risk, the issue will be compounded. A retiree who has superannuated at 60 and may well live till 80 must be careful with withdrawals, particularly when fallback options are limited. A perceptible section of the country’s ageing population is already dependent on family members for financial support. In fact, “dependency ratio”—the average number of financially dependent people for every 100 productive citizens—is not favourable in India. And, even in the 75th year of our Independence, there is no sign that the ratio will improve meaningfully in the days to come.

The other choice—one that is difficult to exercise—is to scale down lifestyle and reduce expenses. While delaying gratification can lead to personal sacrifices, retirees all over the world have to practise restraint. But rising healthcare costs are likely to be a major impediment for them. For the record, medical inflation is markedly higher than the average retail inflation based on everyday consumer prices. Anyone who spends regularly on medicines and hospital bills will be acutely aware of the phenomenon. A normal withdrawal strategy usually fails to take this into account.


Amazon supremo Jeff Bezos recently urged people to be aware of what many believe are recessionary conditions. In the context of big-time inflation, ignited by higher commodity prices in major pockets of the global economy, recession may well become a stark reality. Needless expenditure should be avoided for the time being, and people should not spend too much on perceived luxuries, Bezos argued. That will certainly be viewed as a fair point in the retirement space.

A long recessionary period will hurt retirees everywhere; their risk of running out of money will increase if difficult conditions sustain. At the end, ordinary folks who have saved diligently over decades must rework their withdrawals during retirement and reduce the rate in particularly difficult times.

The other solution lies in higher savings during one’s active years. Earn as much as you can, save every rupee you can. That should be the mantra for every young adult. We are, once again, lagging behind in such matters. Our savings are rarely done in a methodical manner. We frequently squander on wrong investment products, and our portfolios are often laden with deadwood. Moreover, not everyone is ready to consult professional advisors. The average Indian acquires products without resorting first to a specific plan. The scenario will not change in a hurry.

Positive signals, nevertheless, are coming from various quarters. The government is especially keen to increase retirement awareness, and considerable work in this direction has been initiated by authorities such as the pension regulator. At the end of the day, people must address the issue doggedly. Adoption of correct strategies, both for allocations and for withdrawals, is the key. To paraphrase The Godfather once again, we should never hate our enemies, for it affects our judgement.

The author is Director, Wishlist Capital

Debt Management Platforms Lending A Hand To Freedom
Beyond The Limits: Trekking The Trails