If you’ve read anything about retirement, you’ve probably heard of the 4% rule: take out 4% of your savings in the first year, raise it with inflation every year after, and your money should last 30 years.
It’s a useful idea. But it was built on American data, and India is not America. Let’s look at where the rule comes from, how it holds up with Indian inflation, and what rate makes more sense here.
Where the 4% rule comes from
In 1994, a US financial planner named William Bengen looked at historical US stock and bond returns going back to the 1920s. He asked a simple question: what’s the highest amount a retiree could withdraw each year, rising with inflation, without running out of money in 30 years, even in the worst periods?
His answer was about 4% of the starting savings, for a portfolio split roughly half in shares and half in bonds. A later study from Trinity University in the US reached similar conclusions, and “the 4% rule” became famous.
Why India is different
1. Inflation has been higher. US inflation has averaged around 3% over the long run. India has generally been higher, and 6% is a common planning figure. Since your withdrawals rise with inflation, they grow much faster here. Higher returns in India have helped balance this, but not always.
2. The data is American. The rule is based on one country’s history, during a century that was very good for US markets. It’s not a law of nature.
3. Retirements can be longer. If you stop working at 50 or 55, or simply live into your 90s, your savings need to last well over 30 years.
Testing it with Indian numbers
Let’s take ₹1 crore, raise withdrawals by 6% every year, and see how long the money lasts at different starting rates and returns:
| Starting rate | Monthly income to start | At 8% a year | At 9% a year | At 10% a year |
|---|---|---|---|---|
| 3% | ₹25,000 | 56 years | 60+ years | 60+ years |
| 3.5% | ₹29,167 | 43 years | 60+ years | 60+ years |
| 4% | ₹33,333 | 36 years | 46 years | 60+ years |
| 5% | ₹41,667 | 27 years | 31 years | 40 years |
At first glance, 4% looks fine: 36 years at 8%. But this test assumes the same return every single year. Real markets don’t work like that, and that’s where the real risk lies.
The hidden risk: the order of good and bad years
Imagine two retirees, each with ₹1 crore, each withdrawing ₹4 lakh in the first year and raising it 6% a year. Over 10 years, they get exactly the same returns, just in reverse order:
- Retiree A has good years first: +25%, +18%, +12%… and the bad years (−12%, −20%) come later.
- Retiree B has the bad years first.
Same returns, same average, same withdrawals. Here’s what happens:
After 10 years, Retiree A has about ₹1.07 crore. Retiree B has about ₹71 lakh, a third less, from the same returns.
This is called sequence of returns risk. When markets fall early, you’re selling units at low prices to fund your income, and those units aren’t there to benefit when markets recover. The first five to ten years of withdrawals matter most.
So what rate makes sense in India?
There’s no perfectly safe number, but a few principles help:
- Start around 3 to 3.5% if your income needs to last 30 years or more. That’s where many practitioners in India land, and it’s where Bridgit Second Income starts.
- Go lower if you retire early. The longer the horizon, the lower the rate.
- You can go a little higher if you have other income, like a pension or rent, or a shorter horizon.
Make your plan more robust
- Keep 2 to 3 years of income in steadier funds. That way you don’t have to sell equity right after a fall, which takes much of the sting out of sequence risk.
- Be flexible. Skipping the inflation increase after a bad year, or trimming income slightly for a while, makes a big difference over decades.
- Review every year. If markets have done well, you may be able to raise your income. If not, adjust early rather than late.
The bottom line
The 4% rule is a good starting point for thinking, not a promise. In India, with higher inflation and potentially longer retirements, starting a little lower, around 3 to 3.5%, and staying flexible gives your savings a much better chance of lasting as long as you do.
Try different withdrawal rates in our SWP calculator, or see how much you need for ₹50,000 a month.
