Is FIRE at 4% Safe Withdrawal Rate (SWR) realistic ? - Part 2 (Indian context)
TLDR: 4% withdrawal rate based on 25x annual expenses, viability for FIRE retirees at 40, illustrated with some scenarios in the Indian context
One of the maxims that you see around retirement (not early retirement mind you) is this notion of 4% withdrawal rate. Let us take a step back and tackle another maxim which is your retirement savings should be 25x annual expenses.
Retirement corpus = 25 times your annual expenses
This part looks at FIRE in the context of someone retiring in India, the currencies and numbers will be different, if you are more interested in a dollar amount based calculation, check out part 1.
Scenario 1: Retire at 60.
Assumptions
Retirement Corpus = 30,000,000 (3 Crore Rupees)
Equity portion of portfolio = 50%
Debt portion of portfolio = 50%
Annual return on equity = 10%
Annual return on Debt = 7%
Annual rate of inflation = 7%
Annual withdrawal rate = 4% or 1,200,000 (12 Lakh rupees)
Life expectancy: 85
Figure 1: Retire at 60
For someone retiring at 60, they are doing quite well. They are looking good and will be comfortable until they reach 90.(Assuming ideal conditions here)
Scenario 2: Retire at 40
Assumptions
Same assumptions as the above scenario expect retirement age.
But let us talk about people who FIRE at the age of 40. Will it work for them?
Figure 2: FIRE at 40
So clearly, given that the portfolio needs to last longer by 20 years than for someone who retires by 60. The money runs out when they hit 70 and this is again assuming ideal conditions. So let us go to scenario 3.
Scenario 3: Retire at 40 - prioritising withdrawal from Debt first
Assumptions
Prioritising withdrawal from debt first instead of withdrawing equally
Figure 3: FIRE at 40 withdrawal prioritised from Debt first
Now, we are talking. Withdrawing from debt funds first allows the equity to grow for another 10+ years and extending the period by another 5 years. The money runs out when they hit 75.
Scenario 4: Retire at 40 - with a 30% market correction during year 1 of FIRE
Assumptions
Same assumptions as Scenario 3 with a 30% equity correction during year 1 of FIRE
How do they fare with the above added assumption?
Figure 4: FIRE at 40, withdrawal prioritised from Debt first but with a 30% market correction during the first year of FIRE
A 30% market correction puts a significant dent in the portfolio. The money runs out when they hit 65.
Given that all of these scenarios pretty much assume ideal cases with no emergencies, unexpected expenses.
Scenario 5: Retire at 40 - with a retirement corpus at SWR of 2.75%
Assumptions
Same assumptions as scenario 5 except
Retirement corpus close to 4.4 crore rupees
Safe Withdrawal Rate (SWR) = 2.75%
Retire at 40 - with a retirement corpus at SWR of 2.75%
Even at 30x annual expenses, money has run out when they reach 84. This assumes a serious market correction of 30% during year 1 of FIRE. But with adequate planning, this would work and is definitely a safer option with a Safe Withdrawal Rate (SWR) of 2.75%.
These scenarios are rather simplified to illustrate the point, but in a more realistic case there are other things that need to be taken into account
Contingencies need to be put in place especially in the Indian market given the vagaries of the medical treatment, transportation, public utilities like water and electricity
There is also a general view that Indian parents fund the kids education and wedding. Those can be major expenses as well.
FIRE early means there is a longer duration for the corpus to support your lifestyle. You are possibly looking at multiple boom and bust cycles. So those need to be considered as well
If you have expectations to provide for your kids and grandkids a legacy / inheritance then those additional needs/wants need to be catered for as well.
Even though inflation is assumed at 7%, there are several fields where inflation is higher than 7% like medical expenses and education.
Lack of formalised social security payouts or government support in retirement
Multiple boom and bust cycles in the 45 year retrirement period
What are your thoughts around these assumptions and calculations. Leave your comments below.
Happy investing - #MyFatFIRE
Disclaimer : I am not a financial planner or fiduciary. Do not use this as trading advice. Research and invest at your own risk.
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