MF Corner: Experts discuss mutual funds trends & what is safe withdrawal rate post retirement

Mohit Gang, CEO and co-founder of Moneyfront, said, "I think a safe withdrawal rate is a rate or a percentage factor which each and every person can withdraw from the retirement corpus which they have accumulated throughout their retired life or throughout their lifespan. Now there are many variables to this entire equation, it sounds very simple. But the whole thing is there are many variables that you cannot predict."

"The first and the foremost variable out there is how long will you live? So post-retirement, you first have to put an estimation to your lifespan, which is the toughest part. Second, you have to estimate what will be the inflation then. If let us say there are 20 years down more for the retirement and after that, if you will live for another 25 years, you have to virtually estimate an inflation figure for the next 40- 45 years odd, which is absolutely tough," Gang said.

"Then there are variables which you can control, which is like, when will you retire? What is the age at which you will cut off from your corporate life or from your work life and second is what kind of an investment mix you will choose? So these are few variables that you can control. But the ones that you cannot are the real deciders in this game of what is to be the right withdrawal rate of your corpus," he added.

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On ways to compute the kitty, he said, "There are many ways to compute the kitty, which is then you can have an actual replacement ratio method which will say is that you can have at least 68 to 90 percent of your current income or current monthly expenses as your retirement expenses, just a very rough figure. But that is a scientifically arrived range. The second could be an actual expenses method, which says that you put your expenses, list it down, see what expenses will go off after retirement, add new expenses, like medical expenses, or some other expenses, travel expenses, etc. and see what your actual expenses will be. Now basis that your retirement kitty comes in."

He added, "Then comes in a rule, the genesis of which was found out in 1994, by a famous paper, which was written by a financial adviser called William Benjen. So he gave a 4 percent rule and the rule is also called 'Trinity Rule’, which says that 4 percent is an acceptable standard rate of withdrawal from your accumulated corpus. If you assume that your retirement age will be around 25 to 27 years and if assume that the rate of growth in this corpus will kind of negate the rate of inflation, which means that the corpus will keep growing at around 5 to 7 percent annual rate and inflation will also be in that same band. So if you assume these things, then 4 percent rate of withdrawal could actually last you for your retirement age, which could be around 25 to 27 years. So that is also called a 'Trinity Rule' actually."