4% Rule: The Simple Formula That Could Secure Your Retirement
New Delhi, 14th May 2025: The earlier you start planning for retirement, the better. A financially secure post-retirement life requires building a substantial corpus well in advance. One of the simplest tools to help estimate how much you need is the 4% rule—a widely used formula to calculate your retirement savings target.
🔢 What is the 4% Rule?
The 4% rule helps determine the ideal retirement corpus by asking a basic question: If you retired today, how much money would you need to maintain your current standard of living?
According to this rule, you can safely withdraw 4% of your retirement corpus annually without exhausting your savings for at least 30 years. However, a key limitation is that the rule is based on historical inflation rates. Since future inflation is unpredictable—and likely higher—it’s essential to adjust your savings target accordingly. Despite this, the rule can serve as a useful starting point when combined with inflation estimates.
💰 How Does It Work?
The rule suggests that you need to save 25 times your annual expenses to retire comfortably. This assumes a retirement span of 30 years. If you’re considering early retirement, you may need to explore other strategies, such as the Rule of 72, for a more accurate projection.
📉 Example:
Let’s say your current monthly expenses are ₹30,000. That translates to ₹3,60,000 annually.
Using the 4% rule:
₹3,60,000×25=₹90,00,000₹3,60,000 × 25 = ₹90,00,000So, to retire with your current lifestyle, you’d need a retirement corpus of around ₹90 lakh.
It’s advisable to begin building this corpus from your 30s or 40s. Investment options like mutual funds, PPFs, NPS, or other secure instruments can help you achieve this target over time.
📈 Why Mutual Funds?
Mutual funds offer a range of investment choices and historically provide annual returns between 12% and 14%, depending on the fund type and market conditions. SIPs (Systematic Investment Plans) in mutual funds are particularly popular for long-term wealth creation and retirement planning.
