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Saving For Retirement: How Much is "Enough"?


Capital Mind has focussed on a lot of topics. We have decoded scams, we have requested regulation, we have demystified budgets, we have investigated corporate announcements and talked stocks, options, bonds and much more.
But the commentary often has taken many readers into a “what the heck is he talking about?” zone. Perhaps we use too much jargon. Perhaps the level of financial literacy we expect is more than the regular joe will have. Perhaps it’s because no one ever bothered to make things simpler for everyone, and we are also guilty.
And if there’s one thing that’s obvious, it’s that people do not have the time or the inclination to understand finance, by and large. Money is, too often, and important part of living, but it’s not the only thing. If only someone could just tell us what to do, in a simple way, would it not be just great?
Now let’s take this: What Do I Do About My Retirement?
Also read: How much do you need to retire?
Let’s try and find the answer to this in as easy a way as possible. Let me give you one example.

The Scene

You’re 40 years old today. You make 2 lakh rupees a month. You have saved nothing. You have a housing loan, and after everything’s done with taxes, EMIs, school fees and other expenses you have like Rs. 20,000 left. And for the first time, you’ve decided to save some money. What to do now?
The typical answer is: Buy a mutual fund every month for Rs. 20,000. Someone will run this massive SIP calculator and tell you that oye, if you invest 20K per month for 20 years, you will get Rs. 2 crore rupees. Fantastic money for retirement no?
But you know what the real problem is? You have no idea if this much money is enough. Or how much is enough.
Let’s see.
You spend about 100,000 per month today. What if you fast forwarded your life and you moved up to age 60 today? If you were 60 today, you won’t have a home loan EMI (it’s paid off), you won’t have the kids school fees (they’re not kids anymore), and you might add some travel expenses, more entertainment spending, so you’ll only spend 70,000 a month.
But you are not 60 today. You will take 20 years to get there. In that much time, the 70,000 rupees of today will not buy you the same amount of things because of inflation.
The government wants to target 4% inflation a year. So let’s say they succeed. So today’s 70,000, means, in 20 years at 4% inflation, about 153,000 a month. [In Excel, put into a cell “=FV(4%, 20,0,-70000)” without the quotes]

Can your 2 crores let you survive?

Now, consider this – if inflation is truly at 4%, then the “risk free” rate of interest will be close to 4% also. Let’s say life is kind, and you can get a risk free 5% interest.
At 5%, your 2 crores in the first year gives you an income of Rs. 10 lakh. Assume you pay no tax on this.
But you’re spending Rs. 153K a month = Rs. 18.36 lakh per year. But you earned only 10 lakh! So what you will do is to eat from your principal. That means your 2 crore is now is now Rs. 1.91 cr.
You’re seeing the signs, this is not good news at all.
Year 1

In year two, Things Get Worse

You’re now 61 years old.
Because of inflation, the amount you spend per year inches up to Rs. 1.91 lakh. The 5% interest rate means you make 9.58 lakh in income. Again, you’re spending more than you’re earning. So your “corpus” = the principal money that you have falls further, to Rs. 1.82 crore.
Year 2
This keeps going until you hit the ripe age of 72. A few days after your birthday you die of a heart attack because you can’t believe you worked your ass off all these years and suddenly ran out of money.
Because you will. At Age 72, you will be left with Rs. 59,000 in your bank account, which will last you about 7 days and then you’re bankrupt.
Unless you’re in politics, your career options are very limited after you’re 70. So you better start doing that thinking now.

Hello? I don’t have MORE money to save today!

Who’s asking you to save more money? Don’t be judgemental. We’re going to change your perspective.
SIP formulas are stupid. Over the long term. First, let’s get something right.
Assume you believe you will live till you’re 90. What’s the amount you need to keep going, assuming you spend the same way as above? And let’s say at 90, you end up with zero?
The answer: Rs. 4.6 crores. Trust me.
To get 4.6 crores by investing Rs. 20K per month, you need a return of 18% a year! This is simply too much to expect. Or, at 12% the SIP calculator is saying you need about Rs. 47,000 per month. This is way too much, you don’t have the money.
What else can you do? There’s multiple ways to answer this question.
First, consider an “increasing” SIP. Instead of 20K per month, you will do this: You will increase the amount you save by 12% every year. I don’t care how you do it, but start with 20K per month this year,and next year save 22.4K per month and so on.
This will get you to 4.6 crores in 20 years.
Your salary will increase by at least inflation (4%) so it’s the matter of finding another 8% through some saving each year. How much? Well, 8% in the second year is about finding Rs. 1,600 per month – or Rs. 60 per day. If it’s just that, you will motivate yourself to do it.
Second, you can rework your assumptions. Maybe you can work till you’re 65 instead? Doing the same “step up” SIP with the 20K, but with a more modest 4% increase in the amount you invest each year = a saving of 4.8 cr when you are 65. You can now live till you’re 99 with this money.
Or, you decide you’ll cut lifestyle spending at retirement down to about 50K a month of today’s money. For example, you might say I don’t want to stay in a metro, so I’ll move to a more peaceful town. And that’s now about Rs. 3.6 crores of requirement, which you can get with

  • saving 20K a month, increasing the monthly amount at 4% every year
  • and doing this till you’re 62.

The combinations are endless. Tweak this and scale forward.
Third, you can find money where you don’t see it. At Rs. 2 lakh per month of a salary, you are probably seeing money go into an EPF already, which should be around Rs. 20,000 per month extra. IF that yields just 6% in 20 years, it will grow to Rs. 92 lakh by itself. This increases your “cushion”.
Or, your house can be “reverse mortgaged” – where the bank pays you a monthly income against your house as collateral (and tokes over the house after you die, and sells it to recover the money). This gives you “liquidity” from an asset that you aren’t going to take with you when you die anyhow. This can be an emergency option.

A different example

If you’re just 35 years old with the same dilemma, you do the 20K per month, increase it by 4% a year, and the money will grow to 4.6 cr. when you’re 60, just automatically.
If you’re 30, and have already saved Rs. 500,000 then it gets better – you can get the 4.6 cr. with no trouble at all – you need only 7.5% per year as growth!
Also see: How much is enough to say FY?

And Now, The Product

Anyone who’s saving for retirement without at least some guidance from the above number is probably saving “blindly”. This is not bad, but it doesn’t help when you don’t know if you need to push yourself.
Once you’ve come to the point of understanding what you need, you might discover that:

  1. You only need 7.5% a year (net) in returns in order to make your money. So you might as well buy something simple – like a fixed deposit, an arbitrage fund or liquid fund that’s making those kind of returns. You shift up to equity only if interest rates fall. Why take risk when you don’t need it?
  2. You might need more than 12% a year, at which point you start looking for a better job. Or an alternate income source. Because chasing higher returns is better left to professionals.
  3. You need between 8% and 12% a year – for which you just do a combination of debt and equity (balanced funds = half and half debt and equity etc.)

It’s only after you’ve figured out how you will save that the “product” to invest in comes into play.
The fight for slightly more returns is useless. Choosing “the best” fund is also a waste of time. Just find any decently performing fund and buy it – or just buy an index fund.
It doesn’t matter that some other product did better than what you chose. It really doesn’t. You just want it to average 12% a year over many years, or whatever your return expectation is.

The Point?

Finance is just a lot of math. If you think objectively, it doesn’t matter which stock you buy or which mutual fund is giving the best return. The main idea is to know where you need to be at any time, so that you know that you’re getting there. Even if it means getting there with a liquid fund, you’re okay.
If it means you have to find Rs. 80 a day, from next year onwards, you’ll find it.
If it means you have to work a little more beyond 60, you’ll do it.
You may have to make these assumptions and get the right perspective on what numbers work. None of this is rocket science, but it is very very boring and unnecessarily complicated. We hope this post has helped you understand the nature of a personal retirement plan and how you think about getting there.


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