You cannot retire with a crore!
There is an article by Radhika Merwin
“The first step is to calculate how much you will need towards living expenses after retirement, depending on your lifestyle. Let’s say you’re 30 years old, currently drawing an annual income of Rs 10 lakh. What percentage of your income will be enough to cover your living expenses after retirement? A meaningful estimate would be 70-80 per cent of your current income. So, in our example, that makes it Rs 7 lakh a year for expenses after retirement.
Inflation beckons
However, here is where you need to let ‘inflation’ in and brace yourself. Thanks to the eroding power of inflation, the Rs 7 lakh living expenses today will be equal to Rs 66 lakh after 30 years, when you are ready for retirement.”
Then with some calcualtions…she says you need a figure between Rs. 9-13 crores for generating this income…i.e. Rs. 66 L for 25 years…
———End of quote———-for full article see Business Line please….
THERE IS AN OBVIOUS mistake in the article…anybody wanting to comment?
Prof. Pattu of free fin cal NOT ALLOWED PLEASE….lol….
VK
1. Inflation missing after 60 yrs to 90 years of age
2. Additional medical expenses in old age not included
Suhas
She hasn’t taken into account the tax for that amt?
Hari
Dear sir,
the growth of investment all the 28 years [ present age is 30 and planning to retire at 58] is ignored. The inflation adjusted returns !!.
Rgds
Hari
Ramesh
What about post-retirement Inflation?
subra
Yes Ramesh, what about post-retirement inflation – I have not done the calculation, but that alone should DOUBLE the corpus required…so 20 crores 🙂 lol
c j gopinath
I feel retirement corpus should be calculated based on expenses and not on income.one can get a fair estimate of family,s expenses around 40/45 years.
Bala
How the hell am I going to get 66 lakhs earnings when my current job only pays me 10 lakh? I may have only 2-3 lakh to invest.
There is no way there is a scheme on earth which returns 3000% returns annually – for the next 25 years. i.e. I can invest 2 lakh & expect 66 lakh in the same year.
Not even real estate agents give that kind of a projection.
subra
Agreed Gopinath, but what she has done is CORRECT. In 1968 a 26 year old would have been spending say Rs. 300 a month on household expenses…today he would be spending about 45000 a MONTH including medicines – about 150 times.
Assuming the same ratio for a guy SPENDING (not earning) Rs. 25000 a month, he will end up spending about 37,50,000. So you can extrapolate a little here and there…of course the time frame that I have taken is 45 years, and the 28 year old is now 73…not 60…
nitin
Many points already raise above in the comments.
I will include only this – she has talked about the money which will generate income of that figure. After 60, I will assume that 40 more years is the fair estimate of life and thus I will just worry about the Net amount required to SPEND in that period. Thats all.
No one is going to live infinitely. Hence thinking about the income generated will present the astronomical impossible figure for most of us.
G
All of the above are flaws in the model she has used – No inflation post retirement, no extra medical expenses etc.
Another flaw I noticed when I ran this through a spreadsheet – a ‘real’ interest rate of 5% (over and above inflation) has been assumed. This equates to a post-tax return of around 13% year on year!! Not possible unless you have almost all of your money in equity and you witness the greatest bull market ever during your retirement. Anyway, having 100% of your corpus isn’t something you would do after you are 60.
Maybe they started to work the numbers and realized that a headline which says ‘Why you cannot retire with 10 Crores’ will shock the public 🙂
subra
yes G…but let us be fair she has made some assumptions and she is right, but you are right too. A 5% real return is a DREAM run – that too over 30 odd years. Warren Buffett anyone?
yes she has ignored post retirement inflation…
yes 10 crs will NOT BE SUFFICIENT…unless of course he dies at 75!!
G
Agreed sir – it was stated as an assumption so she is safe.
It was just that it awakened the long forgotten excitement of wanting to answer a question asked by the professor 🙂
Ashal Jauhari
Dear Subra, the post retirement inflation has not been considered. That’s OK. In that sense – Our article’s (actually your’s) tag line should be –
You can’t retire with even 10 Crore Rs. in your retirement kitty. LOL.
Thanks
Ashal
Ramesh
Actually, in numbers, a 7 lakhs per annum consumption requires a 25-40x multiple for retirement today, which is 1.8-2.8 crores in today’s values. If he has that corpus today and that corpus continues to generate 3-4% real returns, there are very high chances that he will be able to sustain his lifestyle throughout his life and maybe even leave assets for the next generation.
This 2-3 crore after 30 years, @8% inflation rate (rule of 72 means doubling every 9 years), will mean a value of 8-9x, which makes the figure as 16-25 crores. Nominal returns in this case will be 11-12%.
Technically speaking, this man cannot retire with 1 crore at any point in time.
Subra, your ballpark figure of double the proposed amount comes quite close!!
Sriraksha
The obvious mistake.. inflation isn’t factored in !! Acc. to the given example, if I am 30 today and estimate my living expenses on retirement to be Rs 7 lakhs per annum, this is in today’s value,and assuming a conservative inflation rate of 7 % p.a , I would need around 38 lakhs per annum after 25 years when I retire.
And assuming that I have to live for the next 25 years of retired life, I would need a corpus of 5 CRORES at the beginning of my retired life to fetch me 38 lakhs per annum for the next 25 years ( assuming a rate of growth of 7 % p.a)
And if I also plan to leave behind something for my future generations, the corpus required would be higher !
Mahendra Adake
If one saves half of his salary each year which one should invest in any available financial instrument which can grow at the rate of inflation(minimum rate of growth) then it can be solved easily.
Money earned during 30 to 58 age will give you sufficient money to survive 28 years after retirement.
Now, everyone has to decide lifestyle according to their current income.
siddhant
Subra Sir,
Just a question.. Do you think the guys currently in 30’s will be able to work up to the age 60 & then live Normally healthy after retirement upto 75-80(emphasis on normal healthy life), I have serious doubt considering the current scenario of ailments which I can see across the 30+ year olds,if that is the case do we have to build for this near certain eventuality, rather than normal expenses stuff…..
Pravin
siddhant -more than health,the worrying point for today’s 30 yr olds would be ,will automation make them all redundant? the speed of technological change is quite unimaginable today and what are the chances a 50 year old will learn tech or can learn tech?
Mark
She has not taken into account income growth every year! This means additional surplus to invest every year.