In pursuit of less: how retirees can secure income with leaner corpus

Bengen's floor-and-ceiling strategy requires a corpus of 27-times first year expenses, curbs withdrawal volatility

- Jash Kriplani

Retirement planning is often reduced to a single, anxiety-ridden question: How much savings will last through the post-retirement years? Research suggests that a retirement nest egg that is close to at least 33X the annual expenditure of the first post-retirement year, also known as expenditure cover, is needed.

With this nest egg, withdrawing 3% a year should comfortably cover one's retirement needs for a 30-year post-retirement period. Of course, these withdrawals will rise each year to keep up with inflation.

But can you retire with less cover and still make your retirement corpus last? A recent study suggests this is possible, though not without trade-offs. By accepting some volatility in withdrawals (i.e., fluctuations in retirees' spending power in inflation-adjusted terms), a retiree may be able to retire with less than 33X the first year's post-retirement expenses.

Now, there are strategies that can smooth out the withdrawals even at a lower retirement cover. The study is based on Monte Carlo simulations, which run thousands of "what if" scenarios to see how a strategy is likely to hold up under different market conditions. The current study ran 10,000 simulations for each withdrawal strategy, using 24 years of data on the Sensex returns, debt returns (proxied by 1- to 3-year fixed deposit rates), and inflation (based on the Consumer Price Index).

Here is a look at how three different withdrawal strategies hold up in good and bad markets:

Floor-and-ceiling strategy
William Bengen's floor-and-ceiling strategy uses a fixed withdrawal rate, but with controls. The withdrawal rate is inflation-adjusted for the beginning of the retirement period, and then it is fixed throughout the retirement years. If the retirement corpus's size increases due to positive markets, withdrawals also rise. Withdrawals decrease if the markets turn negative.