Why historical data on withdrawal rate misleads Indian retirees
India’s retirees can’t rely on historical returns like their Western counterparts. With falling asset returns, the safe withdrawal rate may be closer to 3% than the classic 4%.
How much can an Indian retiree withdraw each year without exhausting their savings? Unlike in developed markets where long-term data helps answer this question, India’s limited market history and falling asset returns make the past a poor guide.
In markets like the US, financial data stretches back over a century, providing a robust base for empirical research. William Bengen leveraged this long history in his landmark study on safe withdrawal rates. Analysing rolling 30-year retirement periods, he found that a 4% initial withdrawal—adjusted annually for inflation—would have preserved a retirement portfolio across all historical scenarios. This insight became known as the “4% rule."
India, by contrast, has a much shorter data record. Its oldest equity index, the Sensex, dates back to 1979—just 45 years of history, which is relatively limited given that retirement typically spans about 30 years.
To work around India’s limited financial history, we examined all available rolling 30-year periods starting from June 1979. The first window spans June 1979 to May 2009, the next July 1979 to June 2009, and so on. For each period, we calculated the safe withdrawal rate—defined as the highest inflation-adjusted annual withdrawal that wouldn’t exhaust the portfolio over the retirement horizon.
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Historically, most of these 30-year periods yielded safe withdrawal rates above 4%. But this does not mean future retirees can afford to be equally generous. India’s asset returns have steadily declined over time. With both equity and debt returns trending lower, back-tested results may not just fail to predict future outcomes—they may actively mislead.
Falling inflation offers little consolation. It hasn’t fallen far enough to preserve real returns. The inflation-adjusted returns on a typical balanced portfolio have continued to shrink, suggesting that future retirees are unlikely to enjoy the same portfolio performance as earlier generations.
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Back-testing isn’t enough
When historical data reveals a clear directional trend—upward or downward—simple back-testing becomes an unreliable tool. In such cases, forward-looking models like Monte Carlo simulations provide a more realistic assessment. These simulations generate thousands of possible return paths under varying assumptions, capturing the uncertainty that lies ahead more effectively than backward-looking analyses.
My 2022 study on withdrawal rates in India, which relied on Monte Carlo simulations, found the widely accepted 4% rule to be overly optimistic. In nearly one-third of simulated scenarios, a 4% withdrawal led to premature portfolio depletion. However, reducing the rate to 3% dramatically lowered this risk. A 2024 follow-up study, co-authored with Rajan Raju, reinforced these findings—estimating a safer withdrawal range of 3% to 3.5% for Indian retirees.
In developed markets, where deep data histories exist, the past can serve as a reasonably reliable guide. In India, with a shorter and more flattering past, that luxury doesn’t hold. Retirees must look forward, not back. In this environment, prudence—not nostalgia—calls for a lower safe withdrawal rate.
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Ravi Saraogi, CFA— Sebi registered investment adviser and co-founder, Samasthiti Advisors.
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