Safe Withdrawal Rate (SWR) for retirees in India
The Safe Withdrawal Rate is a critical concept for assessing financial independence, particularly in the context of the FIRE (Financially Independent, Retire Early) movement.
It represents the percentage of a retirement portfolio that can be withdrawn annually without exhausting the funds prematurely during the retiree's lifetime. To illustrate, consider a retirement portfolio valued at $100,000. With an SWR of 4%, the retiree can withdraw $4,000 in the first year. Essentially, this means that if an individual's annual expenses are less than $4,000, they can be deemed "financially independent."
In many articles, the SWR is commonly taken as 4%, a figure based on research conducted in developed countries. However, this assumption does not necessarily hold for emerging markets like India due to significant differences in inflation rates, taxation policies, equity market volatility, and other economic factors.
Why SWR for India is lesser than the "safe" 4% rule of the developed nations?
Several factors contribute to the declining Safe Withdrawal Rate (SWR) in India:
Falling Investment Returns: Both equity and debt investments have shown declining returns over time. This is a structural change in emerging economies as they mature. Investors demand higher compensation for holding investment assets initially due to a higher risk premium and higher inflation. As the economy matures, these yields decline.
Falling Equity Returns: Long-term equity returns, as measured by the 15-year holding period for the Sensex, have been persistently falling. For instance, the Sensex delivered a CAGR of over 20% between 1980 and 2000. However, this return profile declined significantly after 2000, with a decadal return of 13% in 2000–2010, further compressing to 9% in 2010–2020.
Falling Debt Returns: Returns from debt investments are closely tied to inflation. As India has experienced a general decline in inflation rates, interest rates have also fallen. This trend of declining inflation and interest rates is in line with global patterns. This relationship is evident in the decreasing decadal trend of both debt returns and inflation. Assuming an expected long-term inflation rate of 4% and a 1% real rate of return on debt investments, the expected long-term return from debt investments would be around 5%.
Short History of Indian Financial Markets: The sources note that backtesting using Indian market data is not very reliable because the history of the Indian financial markets is relatively short. This limited historical data makes it difficult to accurately assess long-term trends and establish a reliable SWR.
Sequence of Return Risk: The sequence in which returns occur during retirement significantly impacts the longevity of a retirement portfolio. Negative returns early in retirement, combined with regular withdrawals, can severely deplete the portfolio, leaving less capital to benefit from potential future market upswings.
Conclusion
Assuming a balanced portfolio often comprising a moderate equity allocation, such as a 30:70 or 40:60 ratio of equities to debt, detailed studies conducted by Mr. Ravi Sarogi, Mr. Rajan Raju and other experts have recommended the following:
Adjusting for these factors, the sources suggest that a safe withdrawal rate for India is materially lower than the conventionally used 4% rate. A more realistic SWR for India is estimated to be around 3%, and even lower for risk-conservative investors.