Saving for retirement - how much is “enough”?

I often say certain things in life are inevitable and it helps to prepare for what’s sure to come. Retirement means different things to different people. For some it is about finally hanging their work shoes and relaxing at home with their spouse and grandkids, to have a peaceful life of spirituality and happiness. For some, it is a freedom to work on what they are passionate about without having to worry about the bills and food. Either ways, that you will retire is a given. We approximately have almost 50% of our PMS accounts investing towards some variation of a Retirement goal.

And if there’s one other 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, an 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?

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. 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 whatever you can save Someone will run this massive SIP calculator and tell you that oye, if you invest only 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.

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 Rs. 1.91 cr.

You’re seeing the signs, this is not good news at all.

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. 19.1 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.

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? Too much math! Is this simple?

Hang on! We have something that will change your perspective.

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. 4.28 crores. Trust me.

We developed a free Plan tool to not only make the calculation easier for you but also to give you an overall picture of what to do with your money. All you have to do is enter your age, current savings (no problem if it is zero) excluding emergency fund. Leave the return assumptions to default.

Here’s the link for the case discussed above, The values are :

Age : 40

Initial Savings : 0

Monthly expenses : INR 70,000

Plan to retire : 60

Savings to last till : 90

Ignore everything else for now. The breakpoint in the graph on right will show you your retirement corpus value : Rs 4.28 crores.

With zero savings, the SIP amount auto-calculated is Rs 34,276.

The plan you see has 5 salient features :

1. Existing savings : This is the money you have (or not) to kick start your goal. You can see by changing your initial saving amount to Rs 10 Lakh, the SIP value gets updated to Rs 26,800.

2. Return Assumptions : We deal in direct stocks on equity side and MFs on debt side. The return assumptions, 15% on equity and 7% on debt, are considered accordingly.

3. Investible period : Here you can adjust the period you want to invest for and build your retirement corpus.

4. Asset Allocation : Allocations also affect the additional investment required to build your corpus. For everything else remaining same, reducing equity and increasing debt allocation increases the additional monthly investment required to build a corpus.

5. Inflation : The expected inflation is set at 5%. All goals have inbuilt default inflation values.

The Point?

Anyone who’s saving for retirement without at least some guidance from the above numbers is probably saving “blindly”. This is not bad, but it doesn’t help when you don’t know if you need to push yourself.

Finance is just a lot of math. 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 you have to work a little more beyond 60, you’ll do it.

Even if it means you have to save more to retire at 45, you will do it. You will figure out a way to increase your income.

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 at Capitalmind Wealth believe you should not have to do even this much. We therefore assist you in planning all your life goals here.

We hope this post and our tool has helped you understand the nature of a personal retirement plan and how you think about getting there. This off-course is the planning phase. Next is the execution. Planning makes executing a lot easier now, doesn’t it?