The Hidden Retirement Mistake That Could Leave You Broke—Are You Making It?

Retirement is often seen as the golden phase of life - a time to relax, travel, and enjoy the fruits of decades of hard work. But behind the serene image of retirement lies a critical question: Will your savings last as long as you do? 

While most investors focus on building their retirement corpus, Retirement Planning isn’t just about reaching a magical corpus figure, it’s about ensuring that figure supports your lifestyle for the rest of your life. Only few truly understand how the rate at which they withdraw funds can make or break their financial future. Did you know that even a seemingly safe withdrawal rate could leave you penniless if market conditions turn unfavorable early in retirement?

The challenge lies in the unpredictable nature of markets. Imagine starting your retirement in 2008 during the global financial crisis—would your corpus have survived 30 years if your withdrawal rate was too high? This is where understanding sequence of returns risk becomes vital. (Read about sequence of returns risk in our previous blog)

In this blog, we unravel the mystery of sustainable withdrawal rates—exploring how different market cycles and asset allocations can impact your retirement corpus. By the end, you’ll gain actionable insights to secure your financial independence for decades. Don't just plan for retirement—plan to sustain it. Read on to discover how.

Let’s break it down step-by-step to understand how SWRs work and why they matter.

What is a Withdrawal Rate?

Every retiree faces two conflicting goals:

1. Maximizing Income: To enjoy life and cover increasing costs, especially with inflation eating away at purchasing power.

2. Minimizing Risk: To avoid running out of money, particularly during market downturns.

Your withdrawal rate determines how much money you take out annually to fund your lifestyle. A withdrawal rate is the percentage of your investment corpus that you withdraw annually to meet your expenses during retirement. For instance, if you have a retirement corpus of ₹1 crore and withdraw ₹4 lakh annually, your withdrawal rate is 4%.

However, what seems like a simple calculation becomes complex when we account for factors like inflation, fluctuating returns on investments, and market volatility. Choosing an unsustainable withdrawal rate that’s too high risks premature depletion of your corpus, especially during adverse market cycles, while one that’s too low might mean unnecessary sacrifices in your standard of living.

(Consider this: A 1% difference in your withdrawal rate might seem small, but over 30 years, it could mean the difference between a comfortable retirement and financial stress. Read below to see the impact of 1% difference in withdrawal rate on your retirement corpus)

What is a Sustainable Withdrawal Rate Across Different Market Cycles?

When planning for a financially secure retirement, one of the most critical considerations is determining a sustainable withdrawal rate (SWR) that ensures your corpus lasts for the entirety of your retirement years.

A sustainable withdrawal rate is one that allows your corpus to support withdrawals over a defined period (e.g., 30 years) without being fully depleted. Factors to consider include:

1. Inflation Adjustment

   Withdrawals should be adjusted for inflation to maintain purchasing power. This means that while ₹4 lakh might suffice today, you will need to withdraw more in the future as costs rise.

   
   

2. Market Cycles

   Sustainable withdrawal rates must account for the potential of prolonged bear markets or periods of low returns. A conservative approach ensures your portfolio can weather downturns.

   
   

3. Dynamic Withdrawal Rates

   Flexibility is key. Adjusting withdrawal rates during adverse market conditions (e.g., reducing discretionary spending during a downturn) can significantly enhance corpus longevity.

We will dive deep and evaluate how different Withdrawal Rates interact with different market cycles, and assess what makes a withdrawal rate sustainable across a 30-year period. How does one decide about SWR depends on –

a) Asset Allocation

b) Sequence of Returns

(While we analyze historical data and sequence-of-return analyses to illustrate key points, it’s essential to remember that past performance is not indicative of future returns. The goal here is to educate, empower, and equip you with the knowledge to make informed financial decisions.)

(A)  The Role of Asset Allocation

A sustainable withdrawal rate doesn’t operate in isolation. It depends heavily on your asset allocation — the balance between equity (growth) and debt (stability). A balanced and strategic asset allocation is the foundation of a sustainable withdrawal strategy. In this analysis, we consider a 50:50 allocation between equity and debt:

• Equity: Represented by NIFTY Index historical returns (1997 to date) to capture the variability of market cycles and sequence of returns. Equity investments, represented by the NIFTY Index, provide the potential for higher long-term returns. However, they also come with higher volatility and risk, especially in the short term.

  
  

• Debt: Assumed to deliver a stable annual return of 5%, offering a cushion against equity market volatility.

This combination ensures exposure to equity for growth while leveraging the stability of debt to manage downside risks. This balanced approach smoothens the impact of market volatility, making your corpus more resilient against adverse sequences of returns.

(B)  The Impact of Sequence of Returns

Sequence of returns risk is one of the most misunderstood aspects of retirement planning. Most investors focus on average returns, but in retirement, the order in which those returns occur matters just as much.

• Scenario 1: Early Positive Returns

  If your retirement starts with strong market performance, your corpus has room to grow, making it easier to sustain withdrawals.

  
  

• Scenario 2: Early Negative Returns

  Starting retirement with a bear market is a double whammy. You’re withdrawing funds while your portfolio is already shrinking, leaving less capital to recover during subsequent bull markets.

Here’s the shocking truth: Even if two retirees experience the same average return over 30 years, the sequence of those returns can result in dramatically different outcomes.

We have discussed about Sequence of Returns Risk in detail in our previous blog. In this blog, we will use annual returns of NIFTY since 1997 till 2024 i.e. we have 27 annual return numbers, create different scenarios by changing the sequence of how these annual returns were generated and see how corpus grows or reduces in different conditions.

Annual NIFTY Returns

The Million-Dollar Question: What should be a Sustainable Withdrawal Rate based on Analysis of Historical Data?

There’s no one-size-fits-all answer, but historical data provides valuable insights. Financial planners often reference the “4% rule”, which suggests withdrawing 4% of your portfolio annually, adjusted for inflation. But is this rule foolproof?

Our Methodology, Assumptions and Findings:

The historical returns of the NIFTY Index provide valuable insights into the interplay between withdrawal rates and market performance:

1. Higher Equity Allocation = Higher Risk and Reward

While equity-heavy portfolios deliver higher long-term returns, they are also more volatile. We have used 50:50 allocation in this analysis to balance growth potential and risk management.

2. Debt as a Stabilizer

The steady 5% annual return from debt assets reduces overall portfolio volatility, enhancing the sustainability of withdrawal strategies.

3.      Inflation Adjustment

Even with a sustainable rate, you must account for inflation. Without inflation adjustments, the purchasing power of your withdrawals could erode significantly over time, making it harder to maintain your standard of living. In our calculations, we start with an annual Withdrawal Rate and then consider withdrawals as higher of Corpus * Withdrawal Rate or Previous Year Withdrawal + Inflation @ 7%.

Using NIFTY Index data since 1997 and an assumed Retirement Corpus of Rs. 1 crore, we explore how different withdrawal rates fare across market cycles.

• 3% Withdrawal Rate: Highly conservative, ensuring corpus longevity even in prolonged bear markets, but may limit your lifestyle. As per analysis of the past data, there was 0% probability of Investor running out of corpus during his 29-year retirement period. (Even with conservative 30% equity allocation, investor did not run out of corpus in our analysis when withdrawal rate was 3%.)

• 4% Withdrawal Rate: A balanced approach that works in most historical scenarios but could face challenges in highly adverse markets. As can be seen from the chart below, corpus does last for 29 years in all scenarios, however, margin of safety is low. A prolonged bear market may deplete retirement corpus entirely.

• 5% or Higher Withdrawal Rates: These are riskier, especially during poor sequences of returns, and could deplete your corpus within 20-25 years. At 5% Withdrawal Rate, investor runs out of money in 30% scenarios that we tested. (At 6%, investor runs out of money in 89% on scenarios tested! Even with aggressive 70% equity allocation to balance higher withdrawal rate of 6%, investor depleted corpus fund in 36% scenarios.)

Based on analysis of available historical data and different sequence of returns scenarios, we can conclude that a withdrawal rate of 3% to 5% (with higher equity allocation) may be sustainable during Retirement Phase in most cases.

Creating a Practical Plan with Lessons from Historical Returns

To implement a sustainable withdrawal strategy, consider using a Systematic Withdrawal Plan (SWP).  Historical market data provides valuable lessons:

1. Start Conservatively: A 3%-4% withdrawal rate, combined with a balanced portfolio, offers a strong starting point. Overestimating your returns or underestimating your withdrawals can lead to financial stress.

2. Automate Withdrawals: Set up a SWP that provides regular income from your corpus, aligning with your withdrawal rate.

3. Minimize Taxes: Structure your withdrawals to optimize tax efficiency, such as drawing from debt funds or equity mutual funds based on capital gains rules.

4. Prepare for Variability: Markets don’t move in straight lines. By planning for periods of low or negative returns, you protect your corpus from early depletion.

5. Debt is Your Safety Net: The steady returns from debt assets act as a financial cushion, providing liquidity during equity market downturns.

6. Reduce Withdrawals During Bear Markets: Tighten discretionary spending to preserve your corpus when markets are down.

7. Increase Withdrawals During Bull Markets: Take advantage of strong returns to enjoy additional income or fulfill larger financial goals.

8. Track and Adjust: Monitor your portfolio regularly to ensure it aligns with your retirement goals and market conditions.

9. Rebalance Periodically: Ensure your 50:50 equity-debt allocation remains intact to optimize risk and returns.

Conclusion

As you sit back and reflect on your retirement plan, ask yourself this: Are you sure your withdrawal rate won’t leave you broke in your golden years? The harsh reality is that even a seemingly harmless withdrawal rate can silently erode your savings if you don’t account for market volatility, inflation, and the unpredictable twists of sequence of returns. Picture this: what if the next 30 years don’t look like the last 30? Are you prepared for a future where early mistakes or overly optimistic assumptions could mean outliving your wealth?

Retirement planning doesn’t end when you build a corpus—it evolves into a careful balancing act of withdrawals, investments, and adaptability. While historical data provides useful insights, every investor’s journey is unique. A sustainable withdrawal rate isn’t just a number—it’s a strategy, a mindset, and your safeguard against the uncertainties of life. Sustainable withdrawal rates are not set in stone—they depend on your financial goals, market conditions, and risk tolerance. By understanding the interplay between withdrawal rates, asset allocation, and market cycles, you can craft a strategy that secures your financial independence throughout retirement.

Take a moment to reconsider your plan, consult an expert, and act now to ensure your dream retirement doesn’t turn into a nightmare. The numbers don’t lie, but ignorance could cost you everything. Are you truly ready for the financial storms ahead?

After all, the best retirement plan is one that you can live with—literally and figuratively—for decades to come.

Disclaimer: Always remember, while past returns can guide us, they are not predictive of future outcomes. Use the lessons from history as a guide, but always tailor your strategy to your goals, risk tolerance, and needs. Stay informed, stay flexible, and consult a financial advisor to navigate the complexities of retirement planning with confidence.