The 4% rule and what it was measured on

Spend ₹80,000 a month and you spend ₹9.60 L a year. Multiply by 25 and you get ₹2.40 Cr. Many guides to early retirement stop there and call that your number. The 25 is 100 divided by 4, and the 4 comes from two studies published in the 1990s. They are worth reading for what they tested, because it is narrower than the way the rule is usually repeated.

What Bengen tested

William Bengen was a financial planner who wanted to know how much a retired client could withdraw each year without running out. He didn't use average returns. He took the actual year-by-year returns of American stocks and government bonds from 1926 onward and ran a retirement starting in every year. Each retiree withdrew a percentage of the portfolio in the first year and raised that amount with inflation every year after.

For a portfolio split evenly between stocks and bonds, with a first withdrawal of 4%:

no client enjoys less than about 35 years before his retirement money is used up.

At 5% the result was different. Bengen found that people who retired in the late 1960s and early 1970s might have had only 20 years of money.

What the Trinity study added

Four years later, three professors at Trinity University ran a similar test on returns from 1926 to 1995. They reported how often each withdrawal rate survived a given number of years. The table below is from their results for withdrawals that rise with inflation over 30 years.

The authors were careful about what this meant:

The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.

Where the rule stops applying

Both studies used American stocks, American bonds and American inflation. If you invest elsewhere, your history is different, and neither study tested it.

The longest period the Trinity study tested was 30 years. That suits someone who retires at 60. If you retire at 40, you need the money to last 50 years, and the study says nothing about year 31 onward.

The Trinity authors also state that their study did not adjust for taxes or transaction costs. You will pay both.

What this means for the calculator on this site

The calculator does some things the rule can't. It uses your own time span, your own rates, and the legacy you want to leave. It also has a weakness that Bengen warned about by name. It applies the same return every year. His paper opens with an imagined planner who relies on average returns and whose clients are then on course to run out of money. Bengen calls that reliance a logical fallacy.

So use the two together. The calculator tells you what your plan needs if returns arrive evenly. The studies tell you that they won't. Enter a return for retirement that is lower than the average you expect, and the difference becomes your margin. Living off the corpus explains why a fall early in retirement costs the most.