retirement anyone ?

I was skeptical about putting this post, but then, its my blog, and reading is optional… so all those out there who find it boring can give it a miss.. !

Well I just learnt a simple maths formula how to calculate the amount of money we will require for our retirement and how to start saving for it today… !!! I frequently use it to train all new recruits to help them sell pension plans & retirement solutions… It also helps the customers to get up and think that they will have to plan for their retirement as there is no pension scheme in private companies unlike earlier years !!!!

So here goes… (if you find it boring kindly skip) A trainer in me is just born… somehow I am loving training people… !!!!

Lets assume Mr. X is a 30 year old man. (with one kid)

Lets also assume Mr. X wants to retire at 50.

Now if Mr. X has a monthly expense of say Rs. 25,000/- today…

Then how much money would Mr. X require to maintain this same lifestyle at the age of 50. (this is assuming his kid would have grown up and be independent, his son’s school fees will be saved but he will have medical expenses)

So if his house runs in 25000 today at age 30 how much would he need at the age of 50 ???

Future Value = Present Value (1+Inflation)raised to 20

Inflation today is around 10% and food inflation is 16% in India !
However last 20 years the average inflation rate is something around 4.9% and pundits and experts too predict that this inflation of 10% will come down sooner than later. However it going below 6% seems unlikely atleast in the forseeable future. So if we assume Inflation at 6.5%

We get the following :

F.V = 25000(1+6.5/100)raised to 20
F.V = 25000(1.065) raised to 20
F.V = 25000(3.5336)
F.V = 88,091

Yes… to maintain the very very same life style after 20 years you will need Rs. 88,091 !!!! (this is assuming inflation stays at an average of 6.5% over the next 20 years !!!)

This figure shocked me… for a guy who wanted to retire in the hills with a house in Manali with my buddy Crafty… !!!!

But the solution for this is not as difficult as it sounds… !

Now if you would be interested in planning a proper retirement… wouldnt you like to know the amount you would have to save today…

Well…. here we go… its the same formula

Future Value = Present Value (1+Inflation)raised to 20

Now we have to take the rate of return for the investments that we make today.. Today the rate of interest in the best and safest instruments is around 8%. However if we have such a long term with us we could and should invest in equity. Over the past 20 years the BSE Sensex has given returns of around 18% on a CAGR basis. (Compounded Annual Growth Rate)

Now let us not be greedy and assume a 18% return, but I think most will agree if I say I will get around 12% return in equities over a period span of 20 years… ??

Agree ?? if you dont you can take or assume any rate of return and do the following calculation, I am taking 12 % for this example..

88,091=P.V(1+12/100)raised to 20
88,091=P.V(1.12)raised to 20
88,091=P.V(9.646)

Now we divide 88,091 by 9.646 which comes to Rs. 9132/-

Yes… Rs. 9132 is the amount a 30 year old has to put aside every month in a good retirement solution if he wants to retire at 50 with the same life style. No increase in the life style.

The idea is to put aside Rs. 9132/- per month so that he has a huge corpus which will pay him the required 88,091/- per month and at the same time the entire corpus will remain as it is till his death.

Its done with a practical reason, that since you have such a huge corpus that is paying the pension and the corpus goes to the heirs after death, the corpus will ensure the heirs will take very good care of you till the end.

This is a pure figure, assuming he has not saved anything for retirement as yet. If he has already saved money he can contribute less. You can change the inflation rate and the returns rate as per your thinking and acumen and you can find your own figure…

I dont know if that calculation sounded that striking to you… but I use it regularly to train our advisors and whenever I have done demonstations of it in front of investors/customers they are also left watching the calculation sheet completely dumbfounded… !!!!

We dont work for government companies and we are not going to have any pension once we retire… and with the evolving Indian Society we might find our children not wanting us, infact its only fair we plan for our retirement ourselves and not depend on our kids.. !!!

I dont know if this post is interesting to anyone or not.. but I still thought I must share… somewhere inside me a Trainer is born… I love using the marker on the board and giving live examples to our advisors… it is really interesting for me… !!! ๐Ÿ™‚ ๐Ÿ™‚

Feed back is most most welcome !!!!

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47 thoughts on “retirement anyone ?

  1. Ranu Chakraborty says:

    Boss Im not coming back or maybe will migrate to congo……. anyone have the visa rules???? also list of diseases that I will get there and how soon I will tapkau there????

  2. Nu says:

    I liked the post..not boring at all ! Informative and speculative !

    I’ve read and thought and I’ll come back to comment on the actuals ๐Ÿ™‚

    • Swaram says:

      Feedbk is that its useful and I am gonna bookmark it too :mrgreen:

      Go go trainer .. train us some more ๐Ÿ˜€

      And do go settle down in Manali .. we will hv some more reason to visit ๐Ÿ˜›

      Miss Crafty ๐Ÿ˜ฆ ๐Ÿ˜ฆ

      • hitchwriter says:

        I really dont know how I missed replying to your comment… !!!!

        I miss crafty badly… infact I just called her and asked her to break her sabbatical and start bloggging again… !!! Hope I can make her take a break from the break !!!

        lol… do i make sense ??

        bout settling in Manali… gee… the prices out there are quite high now… I hope to collect enough money soon… a house in an apple orchard would be ideal !!!

  3. Pixie says:

    I agree with your figures.. we did the same calculation and we are putting aside our retirement fund.
    These calculations are going to change, so, what we were advised is to check the inflation rate, say in the next 5 yrs and then re-calculate. This would mean another pension fund (we have 1 now) or some other sort of saving which would help us retire peacefully without money issues.

    Our inflation rates do swing a lot and its the food inflation that’s a tad bit more worrying…

    Very informative post Hitchu and no, its not boring.

  4. Indian Homemaker says:

    Very interesting!!!

    I have also heard of a scheme where you sell your house to somebody and you are paid in monthly installments till you die. This is for those who have no other source of income. Do you know about this?

    I feel the idea of retiring in hills is great but one should make sure one has some way of receiving medical care there… I would rather holiday there and back to city life … to live in a comfortable little apartment in Delhi or Bombay ๐Ÿ™‚

      • hitchwriter says:

        Aah Smart Ranu has already replied to you… all major banks are in the process to start this scheme… some have already done so… !! However families with only one house would generally like to leave that house for their kids…

        remains to be seen if Indian mentality accepts this line of thought.. !!

        Infact Indians do not believe in pure term insurance as well… which is best kind of insurance… but doesnt give any return… In India we tend to mix insurance and investment thanks to years of service of LIC

        Bout retiring in the hills… and medical facilities… I get your point but I still would like to retire in more cleaner, cooler place.. ! with the woods and birds and greenery around me… where I can hike my heart out !

  5. Kunal Janu says:

    Nice post. Something that I have been thinking of doing myself. There a lot of other commitments than I need done before investment, but a start to it is definitely required.

    Dhiren Sir, ๐Ÿ˜›
    Would u recommend investing all by yourself or purchase of Mutual funds that have some kind of a safe value. Any Fixed deposit will give you 8 percent for the money u can save. Are all other pension schemes available in the market reliant?

    Thanks for the insight
    Kunal

    • hitchwriter says:

      Nice to see you here Kunal !

      The sooner you start putting in money for your retirement the lesser you have to spare for it… !

      Look… at your young age… it would be smart to invest this retirement fund into direct equity if you get a hang of it or a good mutual fund… ! at this age you can take risks and hence an SIP in a good mutual fund would do good… ! The only problem is mutual funds are a little too liquid… and get sold off whenever we need money… but if we can be disciplined… they are the best way to go… !! Invest in old existing schemes that have given good results over a period of 3 to 5 years… dont bother about the NAV being high !

      If you ask for my candid opinion I would not invest in any pension scheme available in the market… But as it is… I am supposed to teach people to sell them… dont ask me why I would not coz I aint telling that… !

      About the reliance on the pension schemes in the market… most are being offered by insurance companies that are under the perview of IRDA which is a Govt. body so you need not worry about them running away with your money !

  6. Sandhya says:

    This is a very interesting post, Dhiren. My husband calculates in this way only. We have to have Medical insurance and live in a place where we can have medical help immediately in an emergency, like IHM has mentioned.

    We are planning to shift to an apartment which is easy to maintain than this independent house – for security reasons also. Once our sons are married, we will not have major expenditure.

    All the best to you, Dhiren!

    • hitchwriter says:

      SAndhya you should look at that Reverse Mortgage option if your kids have independent houses for them already… !!! its a good concept.. !

      The investment matrix says

      1.) Medical Insurance
      2.) Term Insurance
      3.) Pension plan
      4.) Contigency funds (Fixed Deposits et all
      5.) Mutual funds / Shares / Ulips
      6.) art and collectibles…

      Mediclaim is most necessary !

  7. Rakesh says:

    Yeah, I’ve seen this calculation. But aren’t you supposed to adopt a maximum return rate of 6% in your projections as per the regulations? ๐Ÿ˜›

    • hitchwriter says:

      We are to show returns as per 6 & 10 % as per regulations. However this is my own version… I think I can get atleast 12%. While training we ask the advisors to ask the investor what he thinks he will get and use that percentage.

      The idea is to invest the monthly amount in mutual funds acc to me… but they are too liquid.. so if a person is not disciplined its better to opt for a pension fund…

  8. Smitha says:

    Very interesting, Dhiren. One thing that I feel is absolutely necessary is to plan our retirement, and something like this makes so much sense.. Keep posting such stuff, Hitchy, it is very very interesting.

    • hitchwriter says:

      I never shopped for grocery till I shifted to Indore… When we moved there first Toor Daal was Rs. 30 a kg… the last time I bought it was Rs. 90 a kg.. !! in 3 years to be exact !!

      If we do not… we will be left behind… its important to know the amount we need… I want to retire soon and I want to have a lavish life after my retirement… no more staying at home all the time and working… but lots of travel !!!! ๐Ÿ™‚

    • hitchwriter says:

      Ideally retirement Income needs to start when there is no income.. so that it can be taken as per the existing tax limits and no tax paid… however if say a person is investing the money in direct equity or say mutual funds… currently there is no long term capital gain tax… (it is being mulled though)

      so the money in instruments like those (mf/equity) as per current tax laws would be totally tax free.. !

  9. Pal says:

    Escuss me, one queshtan. Mr X needs Rs.25000 TODAY because he is a family of 4, he has an EMI, monthly grocery, school fees, blah blah blah. However, at retirement age, Mr X has finished paying off all his dues, and only needs two meals a day with some medicines. Does he still need Rs.25000 then?
    ๐Ÿ˜‰

    • hitchwriter says:

      This is assuming the family has just one kid, which I have mentioned above. Also as a retired person you would like to actually have more travel and more social function attending … NO ?? what do you think… the medicines will replace the expense he is now bearing for his kid….

      Also this was a general example… each one can and should take his own expenses… Emi’s need not be taken into this.. !

  10. Pal says:

    To me, it sounds like people who sell pension schemes are trying to scare off poor folks into believing they need much much more than what they actually need. No offence to you, Hitchy. Just an opinion.

    • hitchwriter says:

      the idea of financial planning is poorly sowed still… and with no pensions available its going to be a bit of a mess… unless properly planned…

      Yes this is a pitch to get the customer to eek out a bigger sum… but Pallu you need not put that Rs. 9132 in only pension schemes… you can invest that in an emi to buy a property or you can put that in equity or mf or post… just assume the rate of return you would get in the instrument you are investing and you atleast know what amount you need to put aside…

      A smart customer would not just invest all that in a pension fund… he would scatter it… but it goes without saying… that amount would be required… !!

      Remember inflation currently is at 10% and we have assumed only 6.5% inflation.. a conservative figure… what signals do we get that the inflation will ease ?? Generally in developing economies inflations remain high… !

  11. Destination Infinity says:

    I have sometimes wondered about that – retirement! The trend now, is to retire early!! With the kind of money people are getting now a days, its quite possible if planned properly, as you put it.

    Sometimes I feel all of us should learn to grow fruits, vegetables and even some crops in a farm house – for the way the prices are going!! I would love to do it as an activity, maybe sometime later in my life. I also think that cost of living makes an important factor in planning such retirements. People ought to plan for their cost of living as well…

    Destination Infinity

  12. Destination Infinity says:

    And Dhiren,

    The concept of reverse mortgage is very interesting. I want to write an article detailing all the pros and cons of it, along with some information on it – I hope you don’t mind. Thanks for suggesting that in the comments…

    Destination Infinity

  13. monikamanchanda says:

    but if u go and settle in manali u wont need this money i bet

    i mean ask a person living at manali today he is not spending 25k/month… so ur starting values only differ

    though i agree with whatever u are saying from a perspective of planning

  14. UmaS says:

    Oh, thats wonderful Hitch !!! Thanks for that formula and all….am putting all those to work now….

    A trainer is born !!! LOL !!! Have fun doing your work… ๐Ÿ™‚

  15. Santulan says:

    So if I use this formula (which in it self is a logically and mathematically correct one) I have to save SO MUCH money based on the lifestyle I am targeting post retirement!!!

    Time to start saving

    • hitchy says:

      the sooner you start the lesser you will have to save… so do not wait ! ๐Ÿ™‚
      If you invest in high return yielding schemes… you might need to save a little lesser ๐Ÿ˜€

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