Retirement Math: Do it in pencil, or Whiteboard!
Thanks to my training back ground and having written the book ‘Retire Rich: Invest Rs. 40 a day’ I have done some workshops on ‘Retirement Planning’ at various locations.
There is one question which I HAVE TO ANSWER:
‘How much money as a corpus do I need to retire?’ – and if I say Rs. 2.8 crores there is either a denial or followed up by another question – IS THIS CORRECT AND FINAL’. That question I have not been able to answer.
What a planner tells you is an approximate number. Cannot promise whether this will be correct PERMANENTLY! There are so many dynamics in the market – inflation rate, market performance, your health, your monthly expenditure (most of them do not have a number picked from excel, it is only an ESTIMATE). My argument is that based on
– estimated current monthly expenses
– estimated year of retirement
-estimated rate of return on the assets
– estimated year up to which the client will be alive
NOBODY – repeat NOBODY will be able to give you an EXACT estimate of what you require for RETIREMENT….
HERE is an article on Wall Street Journal read on…
http://www.smartmoney.com/personal-finance/retirement/retirement-math-is-best-done-in-pencil/
Prabhakar .V
I ve gone through your book titled ‘Retire Rich: Invest Rs. 40 a day’. Its really an excellent book. I think everybody should read this book for their happy retirement.
rrp
Let C = current annual expense
I = avg rate of inflation eg 6% ie 0.06
n = number of years
R = annual CAGR rate of return in MF eg 10% 0.10
Y = yearly contribution in SIP
B = Bank interest eg 7% ie 0.07
Then
F = future annual expense = C *(1+I)^n
SIPCorpus = Y * (1+R)((1+R)^n – 1)/R
If SIP corpus is put in bank and the interest is used for creating living expense amount
F = Corpus * B
after some calc,
Yearly contribution reqd in SIP
Y = C (1 + I)^n * R / ( [ (1+R) * ((1+R)^n – 1) ] * B )
rrp
Let C = current annual expense
I = avg rate of inflation eg 6% ie 0.06
n = number of years
R = annual CAGR rate of return in MF eg 10% 0.10
Y = yearly contribution in SIP
B = Bank FD interest eg 7% ie 0.07
Then
F = future annual expense = C *(1+I)^n
SIPCorpus = Y * (1+R)((1+R)^n – 1)/R
If SIP corpus is put in bank and the interest is used for creating living expense amount
F = Corpus * B
after some calc,
yearly contribution reqd in SIP
Y = C (1 + I)^n * R / ( [ (1+R) * ((1+R)^n – 1) ] * B )
Param
rrn calculations are not well thought out… the future annual expense will also rise after retirement – this is unaccounted for…
subra
if a person retires @ age 50 – he can live till say 90 – what inflation can do in 40 years. God help.
rrp
– yes, I am aware of inflation after retirement and its drastic impacts.
– This was supposed to be a very rough calculation and even the variables like R, I are very unpredictable here over long term.Even a small change in R,I can change the final numbers drastically because of compounding. This was supposed to be a very rough start, just to give a rough idea on the numbers.
– I for one will not put money in FD/annuity/debt after retirement at all. I Will put some % in FD and rest (bulk) again in equiy (little bit in Gold). [ Even now i am able to better and faster manage finance (via net) that i could do before. Decades from now, and thanks to info from bloggers like Subra etc, a financially informed guy will be able to better balance money then between equity and debt. All or bulk money in FD is not at all a good idea]
Pravin
btw,whats with the magical 6% we all seem to assume as inflation?
why should we use govt provided data or the RBI’s target rate as the number to use?. in real life inflation is probably around 12%.and much more higher for items like real estate ,education,healthcare etc. credit growth in india is around 19-20% per year.all that money being pumped in must go somewhere.
inspite of the global division of labor and wage arbitrage being major deflationary forces,we can always trust govts and central banks to continue printing money.
i take inflation is atleast the rate at which gold prices increases over a longish period.
subra
Pravin
try calculating how much you need for retirement with inflation rates of 12%, you will not be scared, you will become paranoid. No clue about your age ..assuming you are 32, you will need about Rs. 25 crores if you are a middle class guy. It hardly matters whether you use inflation figures of 6% or 12%, important thing is to start now.
Param
Subra,
How about this – I don’t care about CII & CPI or WPI numbers from govt. Instead, I come up with my own inflation number based on my lifestyle. Lets say it is 7%. Now I find a product that pays 8% post-tax return – say PPF. Now I ensure that the corpus is 1 crore, so that after a year it becomes 1.08 cr, I withdraw 1 lac so that it comes to 1.07 cr (which is still 1 cr adjusted to inflation). Next year, my withdrawal is also adjusted to inflation. This approach allows me to inflation-protect my income & principal (which can finally be left as inheritance). Does this make sense – or is too conservative? Would appreciate your thoughts…
Pravin
subra,
i agree.even 25 crores would be less -who knows how the cost of healthcare or higher education will escalate in the future.will we become a debt loving people like the west?.i sure hope not.will our children start of their careers as debt slaves with huge education loans to pay off?
personally.i am 35 and am not embarrassed to say that i am a penny pincher and a khaddus Value-for-money type guy!my wife and i manage to save 65-70% of our incomes and dont feel it is strange to live well within our means. i lost my job in the 2000 dot com bubble and i guess,i have a taste of how bad things can go.i hate debt,even -housing loan debt -we just paid off our home loan and i feel relieved.as long as we dont do something stupid,i feel we’ll be able to pass on similar values to our child.
param -yes,we all need our own personal inflation index.wpi or cpi are all aggregate measures which dont mean much for the individual.keynesian economists like to deal with aggregate (keeps the math clean) while ignoring that the economy is made up of individuals -aggregates dont reveal much.
Puneet Gupta
Are we not worrying too much?
Life should NOT be a journey to the grave with the intention of arriving safely in an attractive and well preserved body, but rather to skid in sideways, chocolate in one hand, martini (or diet coke) in the other hand, body thoroughly used up, worn out and tired… and shouting “WOO HOO what a ride !!
-Zorba
Pravin
ah yes.that would be akin to leading a life like George Best the immensely talented english footballer. apparently,he spent 90% of his money of booze and whores.and the rest he wasted
subra
Puneet, Pravin,
AFTER an event is over EVERYBODY can see the risks that were there. See a program on Nat Geo and you realize why a plane crashed. Knowing it BEFORE the event is the skill. Zorba statement is all fine – but that is your total attitude to life. Not just towards death. Yes Pravin…just imagine spending on B and W – and then seeking HELP from others for your medicines – not sure it will come. I recently saw one cousin paying for another cousin’s funeral. The cousin who died used to live life far beyond his means :).
Puneet Gupta
Subra,
100% agreed. It was a pun I meant.
Act now is the only option we have, as far as retirement planning is concerned.
For me, it’s come-out-of-the-planning-loop and start execution now.
To myself: There has to be a limit to planning and being scared with the numbers.
Hunter Reed
i am saving money for my retirement because i want to enjoy most of my time as an old man.*,~
Rajeev
Subra,
To get a 10% return post retirement, what debt / equity ratio is needed? I know there can be fluctuations in market, still a longer term perspective can give an estimate.
Appreciate the contents of your blog.