What is the SIP 4% withdrawal rule? Here is how it works 

Retirement should be a time of relaxation and joy rather than one filled with uncertainty and financial worry. To ensure financial security throughout the golden years, it is important to understand the 4% withdrawal rule. 

The 4% withdrawal rule is a well-known strategy for retirement planning. This rule states that if an investor withdraws no more than 4% of their portfolio each year, they will have enough money to last through post-retirement years without having to withdraw their nest egg excessively or even run out of funds. It allows retirees to live comfortably throughout retirement without being concerned about exhausting their assets prematurely and looking toward other income sources too soon.

How does a 4% withdrawal apply to SIPs? 

SIP stands for Systematic Investment Plan and is an investment strategy where you regularly invest a fixed amount into chosen mutual funds. When applying the 4% withdrawal rule, you can see it as an amount you are entitled to draw from your total SIP investment yearly.  

For example, let’s say that at present, you need Rs. 50,000 per month to meet your basic needs. Taking into account inflation over 30 years (6%), that amount can go up to Rs. 2.87 lakhs per month. This means that you would need an investment goal of earning Rs. 2.87 lakhs, rounding it off to Rs. 2.90 lakhs per month through your SIP after retirement to meet your needs comfortably. 

Here, for the 4% withdrawal rule to be effective, you would require Rs. 6.75 crores to meet your post-retirement requirements and structure your SIP investment strategy accordingly. You can also use a mutual funds SIP calculator online to plan your strategy. An SIP calculator helps determine the amount of money needed to be invested each month in order to reach your goals – by considering factors like expected returns, amount, and tenure.

So, how to save and accumulate Rs. 6.75 crores in 30 years? 

The 15 x 15 x 15 rule of mutual funds suggests that if you invest in mutual funds through the SIP mode for 15 years, you may be able to receive up to 15% return on your money and reap huge benefits post retirement. The idea behind this rule is that instead of investing a lump sum amount all at once, you should start with small SIPs and increase them as time progresses. This way, the initial amount invested would be less but over time, the returns would be more substantial.  

If your investment lasts for 30 years, you can expect around 12%-15% return on your money. And when coupled with annual step up and monthly SIPs or systematic investment plans of Rs. 20,000 every month, you can achieve the financial freedom of accumulating approximately Rs 6.75 crore and even more over 30 years. 

And as per 4% withdrawal rule, if your portfolio has grown to around Rs. 6.75 crores after 30 years of investment, you should not withdraw more than Rs. 27 lakhs each year from it for living expenses during retirement to make your retirement fund last for more than 20 years.

The bottom line – When should you use this 4% rule? 

The 4% withdrawal rule should be used as a guideline for your retirement withdrawals rather than a rigid and set rule. Everyone’s situation is different, so there may be times when you would need to adjust the percentage depending on your individual needs and goals. For example, suppose you plan on travelling extensively post your retirement or have healthcare expenses higher than average. In that case, you may need to adjust the percentage slightly so that you have enough money to cover these costs while still maintaining your lifestyle.