‘Subra a 4% withdrawal is considered a safe harbor in the US, is the number for India about 7% pa withdrawal’.

For me the answer is “I do not know”. Sadly we do not have enough data in India. We do not even know the inflation rate applicable to a family of say 4…which goes to 2 in the later stages. We just have to guess that 8% p.a. is a good number to target. Well if the applicable to you is 11%, you can just imagine how far away from accuracy you would be.

The problem with calculating how much you need for retirement is fraught with lots of inaccuracies. Its almost impossible,,,so at best we are guessing. Assuming that we have somehow stumbled to a nice big round figure and we have started our retirement.

Let us see what all we can do to destroy it. Well at least let us the risk that lies in the ‘distribution’ phase of our retirement corpus usage. Let us assume that the biggest risk in the corpus of a Retired person is to deplete the corpus while the person is still alive. Let us call it ‘ruin’.

What are the risks that can lead to ‘ruin’. Most of us think that Sequence of Risk is the main risk. Of course it is a very important risk, but it is not alone. There are many other reasons (risks) which will cause ruin.

• Longevity risk – the risk of living too long. If you think you will die at 82, but go and live till 113!!
• Market Return – you expect to get 12% return, but it turns out to be 8%
• Inflation – being far higher than what you estimated
• Real Return is less! (points no. 2 and 3 combined – worst case scenario)
• Amount we choose to spend in the early part
• Amount we are FORCED to spend due to various reasons
• Amount of money our children FORCE us to draw down
• Medical or other emergencies that is not covered by insurance – FORCED draw down
• Inability of handle complexities could lead to an sub-optimal returns
• Risk that we don’t know exists. Will know ONLY when it happens!

I have spoken about Sequence of Return Risk in the past – go and have a look at it. “Sequence risk” is introduced when we spend from or invest in a volatile portfolio of stocks and bonds. If we plan to sell shares every year for the next 3 decades, we have no idea today what the selling price, or even what the interest rates could be. That uncertainty creates sequence risk.

There is another problem – all these risks run concurrently. So if we get a poor sequence and we compound it with higher drawings and poor choice of equity, OBVIOUSLY risk is more. Far more.  Our life expectancy and the size of our portfolio change as we age tells us that probability of ruin also changes as a result of aging. The amount we need to spend regularly might also change over time. Also as our expectations of future portfolio return changes, we might panic and re-allocate in PANIC. That could dramatically increase the probability of ruin!

But, the size of our portfolio and our life expectancy are certain to change as we age. Assuming you estimated life to be 83, at the age of 83 the probability of you living to 90 is perhaps higher now!!