Lesson 6 of 6, 5 minutes
Living off the corpus
What happens after you retire, and how long the money lasts.
For years the money moved one way. It left your salary account and went into your investments. On the day you retire the direction turns around. Each month you take out what you need to live, and what remains stays invested and keeps earning.
How long the corpus lasts now depends on a contest between two rates. Your investments earn a return. Prices rise by inflation, and your withdrawals have to rise with them so that you can keep buying the same things. What is left of the return after inflation has taken its share is the real return.
With a return of 8% and inflation of 6%, the real return is about 1.9%. You find it by dividing, not subtracting: 1 plus the return, divided by 1 plus inflation, minus 1.
A small real return buys many years
Take a corpus of ₹2.40 Cr, which is 25 years of spending at ₹80,000 a month. Both figures are in today's money, and the withdrawal keeps its purchasing power throughout.
| Real return of 0% a year | 25 years |
|---|---|
| Real return of 1% a year | 28 years |
| Real return of 2% a year | 34 years |
| Real return of 3% a year | 45 years |
With no real return, 25 years of spending lasts 25 years. Every point of real return stretches that, and the stretch gets longer with each point, because a corpus that lasts longer also earns for longer.
Decide the legacy on purpose
If you plan to spend the last of your money in your final month, any surprise near the end leaves you short. A legacy in the plan is what you leave to your family, and it is also your margin for a long life. In the example plan, a legacy of ₹1.00 Cr adds ₹51.98 L to the FIRE number at 55. The rest of it is earned by waiting.
What this picture leaves out
Everything above assumes the same return every year. Real markets don't behave that way. They can fall by a third and take years to recover, and the timing of a fall matters. A fall in your first years of retirement does more harm than the same fall fifteen years later.Early on you are withdrawing from a corpus that has just shrunk, so you sell more of it to raise the same amount, and less is left to recover when prices come back.
The calculator doesn't model this. Treat its answer as the plan for an average path, and keep room for a worse one. The 4% rule and what it was measured on covers the research that tested withdrawals against real market history.
Do this week
- Work out your real return from the two rates you put in the calculator. If it is above 3%, check whether your return assumption is one you would rely on for 30 years.
- Decide now which spending you would pause in a year when markets fall, such as travel or a large purchase. A plan you made calmly is easier to follow.
- Put a date in your calendar to rerun your plan once a year with your actual corpus and actual spending.