Retiring early is only half the financial challenge. The bigger question is how to make your retirement corpus last for the next 40 years or more without being forced to sell equity investments when markets are falling.
For someone retiring in their 40s or early 50s, conventional retirement rules may not be enough. The popular 4% withdrawal rule, for instance, was developed using US market data and around a 30-year retirement period. An early retiree in India could need to fund a significantly longer retirement while also dealing with inflation, taxes and rising healthcare costs.
“The 4% rule comes from William Bengen’s 1994 work on US market data, calibrated to a 30-year retirement on a balanced US stock and bond portfolio,” said Sandeep Jethwani, co-founder, Dezerv.
Someone retiring at 45 could potentially need to fund 40–45 years of expenses, he said. That makes the withdrawal rate and the way the portfolio is structured particularly important.
Why the 4% rule may not work for early retirees
The 4% rule is often used as a simple reference for estimating how much a retiree can withdraw from a portfolio in the first year of retirement, with subsequent withdrawals adjusted for inflation.
But early retirees face a much longer withdrawal period.
Sanjiv Bajaj, joint chairman and managing director, BajajCapital Ltd, said a more conservative starting withdrawal rate of around 3–3.5% could be considered as a broad reference point for someone retiring early.
However, neither 4% nor 3–3.5% should be treated as a universal formula.
“The right withdrawal rate depends on the person’s expenses, investment portfolio, inflation assumptions, healthcare needs and legacy goals,” Bajaj said.
Jethwani also cautioned against assigning a single withdrawal rate to every retiree. The required corpus depends on how large the portfolio is relative to expenses and how those expenses evolve during .
Inflation is particularly important. Jethwani said affluent households can experience spending inflation and lifestyle enhancement that are higher than the standard consumer inflation basket.
This means an early retiree should calculate the corpus based on the lifestyle they actually expect to maintain rather than simply applying a generic withdrawal formula.
Build a debt runway before the market falls
One of the biggest risks after early retirement is having to sell equity mutual funds during a market correction to meet regular expenses.
Suppose an investor retires at 45 and the stock market falls sharply in the first few years. If the investor has no other source of income and continues withdrawing from equity, they may have to sell more units when prices are depressed. This leaves less money invested for a potential recovery.
This is known as sequence-of-returns risk. It becomes particularly important when the retirement period is long.
“This is one of the important aspects of planning for an early retirement. The objective should be to reduce the possibility of being forced to sell equity investments during a market downturn,” said Bajaj.
He recommends a bucket approach, with two to three years of expected expenses held in liquid or short-term debt securities. These assets can fund withdrawals during market corrections, giving the equity portfolio time to recover.
Rahul Jain, president and head, Nuvama Wealth, similarly suggested maintaining a contingency buffer equivalent to two to three years of living expenses in debt or liquid instruments.
Jethwani takes a more conservative view for early retirees. He suggested a fixed-income runway covering five to seven years of essential expenses rather than the two or three years that may be sufficient for a conventional retiree.
The reason is that an early retiree has no salary to fall back on, while a poor sequence of market returns early in a 40-year retirement can cause lasting damage to the corpus.
Jethwani also recommends separating essential and lifestyle expenses. Essentials such as groceries, utilities, insurance premiums and basic healthcare should be funded from fixed income. Lifestyle expenses can be supported through withdrawals from equity and hybrid investments.
Refill the safe bucket when markets are strong
Having a debt reserve is only one part of the strategy. Investors also need a rule for replenishing it.
Jethwani recommends topping up the fixed-income runway during good market years. During poor market years, the investor can draw down the runway and leave the equity portfolio untouched.
This creates a buffer between market volatility and day-to-day expenses.
For example, if an early retiree has five years of essential expenses in fixed income, a market correction does not necessarily have to result in equity sales. Once markets recover and the portfolio grows, part of the gains can be used to rebuild the fixed-income reserve.
Bajaj also recommends making such decisions through a predefined strategy rather than reacting to market headlines. The more conservative buckets can be replenished during stronger markets depending on the overall .
The portfolio should also evolve as the investor gets closer to retirement. Bajaj and Jain said investors can gradually increase debt exposure as the retirement date approaches, reducing the risk of a large market fall immediately before the money is needed.
Don’t ignore healthcare costs and emergency reserves
An early-retirement portfolio needs to account for expenses that can rise significantly over several decades.
Bajaj cautioned that healthcare costs can be particularly damaging because a major medical event could force an investor to liquidate long-term investments at an unfavourable time.
Adequate health and a separate contingency reserve can therefore help protect the retirement corpus.
The same principle applies to unexpected expenses more broadly. A retiree who keeps all their wealth invested for long-term growth but has no liquid reserve may be forced to disturb the portfolio at the wrong time.
For someone retiring in their 40s, this matters even more because the portfolio may need to survive multiple market cycles.
Early retirement therefore requires more than reaching a target corpus. Investors need a withdrawal strategy that accounts for a potentially 40–45 year retirement, inflation, healthcare costs and market volatility.