Many young people in India now dream of retiring early — some even before 55. But retirement planning is not easy. Questions like “How much money will I need?”, “How long will it last?” and “What if expenses rise?” can confuse anyone. That’s where the 4% rule comes in — a simple method to figure out how much you must save before you stop working.
This method is popular in financial planning circles across the world. However, experts say that unquestioningly trusting this rule can create problems later. So, let’s break it down, understand how it works, and what you should be careful about.
What is the 4% Rule in Retirement Planning?
The 4% rule says: if your retirement savings can give you 4% income yearly, you can retire safely without running out of money. That means you should have 25 times your annual expenses saved.
For example:
- If your annual expense is Rs. 10 lakh,
- Then you will need Rs. 10 lakh × 25 = Rs. 2.5 crore as your retirement fund.
You can withdraw 4% of your total savings every year, and your money will last for about 30 years — that’s the base assumption of this rule.
Can You Use the 4% Rule for Early Retirement?
According to personal finance expert Anmol Gupta, the 4% rule works best when someone retires around 55 to 60. That’s because the rule assumes your retirement will last for 30 years.
If you want to retire early — say at 45 or 50 — you may live for 40 to 45 more years. So 4% may not be enough, and you may run out of money earlier than expected. A 3.5% or even 3% withdrawal rate may be safer in such cases. That also means you’ll need to save more than 25 times your annual expenses.
Don’t Ignore Inflation — Your Future Expenses Will Be Much Higher
Many people make the mistake of planning retirement based on today’s monthly expenses. But inflation eats away your money’s value every year.
Let’s take a simple example:
- You are 30 years old now.
- You want to retire at 55.
- Your monthly expense is Rs. 60,000 (Rs. 7.2 lakh annually).
Now, assume inflation will be around 6% every year. According to Rule 72, your expenses will double every 12 years.
So:
- After 12 years, annual expense = Rs. 14.4 lakh
- After 24–25 years, annual expense = Rs. 28.8 lakh
Apply the 4% rule:
- Rs. 28.8 lakh × 25 = Rs. 7.2 crore
So, you will need Rs. 7 crore or more to retire at 55 — not Rs. 2.5 crore.
This is a big gap that most people don’t consider in the early stages of planning.
Where the 4% Rule Fails and Why You Must Plan Better
The 4% rule is based on past data and average returns from U.S. markets. But things are changing.
Today, market returns are unpredictable, life expectancy is longer, and inflation in India may stay high. In such a situation, depending only on the 4% rule is unsafe. You must plan flexibly and smartly.
Personal finance planners say modern tools and retirement calculators are better than thumb rules. These tools adjust your plan based on real numbers like:
- Your actual spending
- Inflation rate
- Investment returns
- Health care cost
- Retirement age
- Expected life span
You can update these tools every year and change your strategy if needed.
What You Should Do for Better Retirement Planning
- Start early: Begin saving and investing in your 20s or 30s.
- Invest smartly: Use a mix of equity, debt, mutual funds, and SIPs.
- Review yearly: Track your expenses, income, and fund performance.
- Use retirement calculators: Don’t rely on general rules.
- Include inflation: Always project future expenses with rising prices.
- Have an emergency fund: Keep a safety fund outside your retirement savings.
- Avoid blind withdrawals: Don’t take out money just because a rule says so.
Remember, your retirement plan is unique — don’t copy others. A clear strategy, regular review, and wise investments will help you retire peacefully and on your terms.
Sources: Financial Express, 7Prosper
