# A Million Dollars for Retirement?

One million Dollars used to be considered a safe harbor for most people. Becoming a Millionaire in the US of A, and becoming a ‘Crorepati’ in India were considered to be ‘Rich’.

Today if you plan to live in the stupidly overpriced cities of India, you will be living in a house which is worth ‘Rs. 5 million’ at least!

So is US $ 1 Million enough to retire in the USA? I think not.

In India last week I met a senior executive of an M N C who wanted to retire. As he was just 53 years of age…and spending Rs. 70k a month, my calculator said…’Sir you will need Rs. 3.25 crores as a corpus’. Luckily he was already there…so it was not a difficult call for him or for me. Otherwise most people need a lot of drumming about why they need Rs. 3.25 crores when his father needed less than Rs. 15 lakhs – about 25 years back. L O L that is the power of compounding. Please remember that good quality independent research is NOT AVAILABLE for Indian conditions…so here is a link to good research in UK…

if you find articles in the US and UK context …and you want a short cut, just multiply (for US $ use Rs. 30 for conversion) and for the Pound use Rs. 50 ….

so if this article inspires you…you will need 600, 000 Pound i.e. Rs. 3 crore.

qed, i REST MY CASE.

I find 2 things very difficult to understand. People have small salaries, they get themselves insured. Very good. However as their monthly spending increases, THEY do not increase their sum assured. Also as income increases and their consumption increases…THEY do NOT increase the amount to be set aside for Retirement either. This is stunning. In my book…I have created a table…showing how much to set aside per month…if your current expenditure is X and you are 30 you need to save say 1X…but if you start at 45 it may have become 2X…..

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## Puneet

I agree with you.

Personally speaking, I find it very difficult to get out of flat-investing mindset.

It’s easy to make calculations and projections on flat premises.

For instance: You should be investing RsX per month till 25 years to make a retirement corpus of Rs. Y; assuming 12% returns annual.

Factors like future income growth; adhoc income etc might bring in variations and make things look less scary.

Are you aware of any calculator that could do some reasonable calculations making use of future income growth also?

## Manish

Puneet

You can use the formula for it . Its

A * [(1+r)^n – (1+g)^n] / (r-g)

Where A is amount invested periodically , r is rate of return you expect from your investment , g is growth in your savings each year (will be same as your growth in income) and n is number of years . here is a example i did in python (** means to the power)

>>> r = 0.12

>>> g = 0.08

>>> n = 10

>>> A = 100000

>>> Final = A * ((1+r)**n – (1+g)**n)/ (r – g)

>>> Final

2367308.02767856

Hope it helps .

Manish

## Puneet

@Manish: thanks! . good to know you know python ðŸ™‚

## Avi

Manish

Is that the correct formula though? I have created an MS Excel version of the above formula –

(B1 * ((POWER((1+B4),B2)) – (POWER((1+B3),B2))))/ (B4 – B3)

where

B1 – Total invested Amount for the year

B2 – Number of Years

B3 – %age increase in invested amount each year

B4 – Return

Now to validate if the amount computed by this formula is correct, I referred to a random portfolio analysis at valueresearchonline – http://new.valueresearchonline.com/story/h2_storyview.asp?str=101327

I am pasting a snippet from the analysis which contains some numbers which don’t match if you try using the formula to derive the final corpus amount.

“So, if you invest Rs 8,000 every month for the next 31 years in the suggested mutual funds and increase this contribution at around 5 per cent every year, you would be able to arrive at the required retirement corpus of Rs 2.34 crore*. This strategy will even help you withdraw Rs 10 lakh required for your down payment at the end of five years.

*At an assumed 10% compounded annual rate of return.”

If we plug in the numbers into the above formula,

B1 – 96000

B2 – 31

B3 – 0.05

B4 – 0.1

The final derived amount is 28140101.76 as opposed to the 2.34 crores.

I must confess I don’t know what would be the correct formula myself but it’s definitely a handy (and a more practical formula) for investors such as ourselves who will not invest a fixed amount all their lives.

Avi

## Manish

@Puneet ðŸ™‚ I do .

@Avi

Not sure , but my formula is correct , you can derive it yourself if you like maths . May be they are having some assumption which is not clear to us or known to them (valueresearch) . You can safely use the formula give by me .

Manish

## Manish

Puneet/Avi

You can use this formula for increasing SIP calculator

http://www.jagoinvestor.com/calculators/html/Increasing-SIP-Calculator.html

Manish

## Puneet

Thanks Manish!

## Sanjeev Bhatia CFP

The formula by Manish is absolutley correct. This is a simple growing annuity formula we use if the contribution increases by FIXED PERCENTAGE over the years. If the contribution increases by FIXED AMOUNT, we have to use different formula though. The diference can also be there in case you calculate on two different premises, i.e. amount is deposited in beginning of year or it is deposited at end of year.

Hope it helps.

Sanjeev Bhatia CFP

## Avi

Manish

Awesome! Thanks Dude

I was going to investigate further about the formula

this long weekend in anycase when I have

a chance to take a breather. But more or less I do

trust your data/analysis Mansh ðŸ™‚

Avi

## Rajeev

I find the bloomberg retirement planner very good. It has all the features desired. Inflation correction, returns before & after retirement and also future contributions to retirement fund. For India we will have to take 12% returns before and 10% after retirement. Inflation is anyones guess but I would take 6%.

## Rajeev

Link of the bloomberg site is as below

http://www.bloomberg.com/personal-finance/calculators/retirement/

## subra

http://www.freefincal.com has far superior calculators…please have a look