Not sure about how many readers will agree with this…but this is my view.

There are many problems in India, and surely many, many financial problems…….however I think these are the 3 major problems:

a. People underestimating retirement requirements: Many 45 year old people whom I meet underestimate their pension requirement. Not just underestimate, but are very far away from the correct figure. They mostly extrapolate from their parent’s requirement, even when they know that they lead a very, very different kind of lifestyle.

When you tell them they need Rs. 5 crores, their first reaction is denial – ‘my father had only 7 lakhs when he retired in 1989’ or he had ‘only Rs. 22 lakhs when he retired in 1998’.

If your expenses at the time of retirement is Rs. 400,000 per annum you will need at least Rs. 1.6 crores when you retire. However while every body claims that their expenses are Rs. 400,000 per annum, they forget purchases like a washing machine, air conditioner, laptop, car, etc. etc. You need to provide for at least one white good purchase every year. Assuming that is Rs. 50,000 – you need another Rs. 20 lakhs.

Similarly if your house is 20 years old – you will need a new house in another 10 years time – at least provide for the cost of construction. 2000 sq ft. house? at Rs. 3000 a s f. – that is another 60,00,000 Rs.!!

b. The Y gen – which is under 30 is terribly over-estimating its own ability to grow its income at a clipping pace INDEFINITELY. They see their past 2-3 years income growth and are projecting it for the next 10-15 years. Sadly a 8% growth will not happen PERMANENTLY. Some of them are so cocky about getting a job that they are willing to sit at home WITHOUT a job. Why they are even willing to quit a job if they are NOT SURE about what they want to do. This is not about chasing their passion – it is just being a little confused!

c. Awful financial literacy: The lack of financial knowledge is so stunning – people who have bought pension plans think they have bought a credit card :).

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  1. Hi Subra!

    How are you?
    I read your article in wealth today.. Its simple & very knowledgeble..
    I like the quote very much.. ( icing on the cake, not the cake itself… ). i am gonna use that quote in my sales pitch & will ask my team also to do that. Also enjoys your blogs.

    Rahul k
    ZSM- mumbai
    Hdfc securities.

  2. Retirement requirement: Not sure how you computed 5cr here but most calculater I’ve seen seem to calclate corpus that will give annuity equal to annual living expenses. What this means that corpus remains intact when you die. Why should it? If retirement corpus is equal to one which gives annuity for estimated living life and exhausts itself at the end, then corpus amount will be greatly reduced.

  3. Hi Subra Sir, I could not agree more with this blog. Point number b is absolutely bang on target. Just because a person gets 10-20% increment as a fresher, does not mean he can get same level of increments when he/she reaches mid-management.

  4. Subra bhai,why do you need 1.6 crores if you spend 400K? I did a basic calculation.

    – assume someone is going to retire today
    – expect to survive for 30 years more
    – expenses are 400K per year
    – invest with a 9% post tax return and 8% inflation

    They need 1.07 crores.

    If you consider 9% return and 9% inflation (that is, they just about match inflation with their return) they will only need 1.24 crores.

    If a 45 year old expects to retire after 15 years (and then live 30 years onwards etc) then the amount is 3.4 crores when he’s 60, which at today’s value (inflation of 8%) is 1 crore.

    I’d written a retirement calculator which I used for this:

    I know the rule of thumb is 400, but I’m not sure why. At best it seems to be 300 for thirty years?

  5. it is funny Deepak! When you step out of the house and you know you need Rs. 200 for the whole journey, you still keep at least 1k + a credit card + a debit card..etc. Why do we do it? In economics it is called PRECAUTIONARY MOTIVE. So you end up having a cushion.

    Also the 400k does not include any REPLACEMENT EXPENSES like a washing machine, refrigerator, car, an extra cushion. After all in a social science like retirement planning, ‘exactness’ is tough to achieve. As a CA we have been trained to err on the ‘safe side’. The rule that people use in the US is 30 times as a thumb rules..even here if you use 30, the estimate will be very, very close to Rs. 1.2 crores…

  6. I totally see the second point ..i have many friends who think a increase of 15% a year is minimum they should get and they believe it will never come down. I have seen few of my colleagues shifting job for salary hike even if their current salary is clearly over and above their experience.These people never compromise on anything below 15%

  7. a most topical discussion, tks Subra/Deepak.
    I agree on the cushion simply because various assumptions can go awry , even if for a very short period. for instance inflation in Thatchers UK was close to 22% at its peak. though long term it might even out. but what to do for the 3 years it shoots up? And this in an country obsessed with inflation in a region where the basis of an economic union is the ability to keep deficits/inflation to a pre-agreed target.
    similarly the markets on investment side.

  8. i have done an article for Careers 360 – saying what a guy should do if he has an educational loan, but no job. Had received one CV of a guy who had spent (his father’s) Rs. 10 Lakhs to get an MBA degree. The best (only) offer on hand was a Rs. 100,000 job…I mean p.annum, not per month. I would have laughed if it was not such a serious matter. Gen Y get real…the world out there is cruel

  9. I am not very convinced by the replacement expenses theory.

    The cost of white goods is not too high compared to salary. When I estimate my annual expenses it invariably includes white goods purchases unless I am buying a top of the line item that costs a few lakhs today. A Rs 7-8000 semi automatic washing machine or a Rs 30-40 k LCD or Rs 23k for a 350 ltr refrigerator or Rs 20-25k for an AC doesn’t skew the expenses too much.

    Also, even at this stage of heavy use and kids I haven’t bought items at the rate of one / year. All items have a trouble free life of up to 7-8 years and a comfortable stretch of another few years. There are going to be no more than three such purchases post retirement. One item / year is too much.

    Cars are a different matter. The cost is partially offset by disposing off the older one. This facility is not available in white goods where the resale value is nearly zero. However, even after the resale offset it can be quite an expense. It’s useful life will also be in the range of 10 years approx. As an old person I would not want a vehicle that is not dependable. So agreed.

    House is a different matter altogether. So far, in India, the value of a house is largely measured by where the house is rather than what condition is it in. An older house in the middle of the city possibly appreciates in value. It makes a lot more sense to keep moving towards the periphery and save money in the process than to spend money on repairs and refurbishment. Depends on the situation actually.

    Also, post retirement one can move to smaller units as well.

    But a house is something one doesn’t need to provide for in retirement. The goal should be to retire with at least one decent property that is left for self use once all responsibilities have been discharged.

  10. When I say financial illiteracy I mean the basic from knowing what a bank account does for you right up to understanding how to make an ULIP work. It also means NOT trying to predict tomoro’s happening on the based on past happening. If you think that real estate will go up at a rate far greater than inflation for long periods of time, please go back and check your Economics. Nothing to do with personal finance. Going forward your house will be broken down AND YOU WILL PAY FOR THE NEW construction.

  11. Subra, Most of the points are valid. An interesting aspect is that if one plans to leave the corpus intact after one’s life time, the usual result is that one enjoys a good (and consistently improving) standard of living AND leaves behind a great corpus.

    On the contrary, if one “plans” to generally deplete the corpus and “Live it up fully”, one usually ends up as a dependent of some other individual or ends up in penury. Often, both!

    As any CA would agree, better safe than sorry! Especially with one’s own retirement planning.


  12. In my opinion, we should leave out inflation when modeling for any scenario in India. The volatility as well as the amplitude of inflation is too high to distract one away from the topic at hand. And I assume that 6-7% real returns could be expected from equity in long run, as it would be near the real GDP growth in next 15-20 years.

  13. I feel planning for full depletion of your corpus is not safe. There are many unforeseen events like medical costs or travel etc which you can not avoid.

    Leaving an amount to your heirs is also a good thing. If you plan to consume your savings before you die then you have to be the best astrologer in the world. No one can predict these things. I would prefer to be comfortable and spend my retirement in comfort rather than hope that I die before 80.

    I would personally prefer my real estate holdings to be passed on to my children, the way my parents did to me. Wealth can increase over generations.

    I live abroad and see that people die in care homes and consume their entire life savings including reverse mortgaging their homes. Nothing left for the children. Not a very “Indian” concept.

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