For most Subramoney readers this title should not come as a surprise. I have been an advocate of start early, keep increasing and get equity oriented in your investing…so this is a good question to ask.
In a perfect world a fee only financial planner should be able to tell you how much you would have accumulated. Pattu would have created a calculator to tell you where you are going and you would know exactly how much of the race is left.
Alas, the world is not so perfect. I am not sure how many financial planners will tell you “I do not know” but that to me is the perfect answer. All of us can make an imperfect attempt.
Let me hazard a guess. A person starts thinking about his retirement (amazingly optimistic) say at the age of 25 and starts saving/ investing for retirement at Rs. 5000 per month going up by 10% every year till age 30. So his savings (or investing) target would be Rs. 465,000 or approximately Rs. 450,000 by the age of 30. I am not talking of how much this could have become (for that there are calculators, right?). So just go and check on your 30th birthday whether YOUR contribution to provident fund, ppf, elss, etc. is about Rs. 500,000 at least. Let us assume this is earmarked for your retirement. I am assuming that all your other needs are met by other means of saving / borrowing / etc. Assuming that you were exhausting your 80C limit, you have been saving Rs. 12500 per month, and out of this about Rs. 500,000 has been earmarked for retirement.
So at the age of 40 how much should your savings for retirement be? Well continuing our 10% story assuming that you started off at age 30 with a figure of Rs. 8000 per month, your contribution should be about Rs. 750,000 by the time you are 35 and Rs. 18,00,000 by the time you are 40 years of age.
Check: Do you have a 12 year old PPF account? (at least 12)
Your EPF is looking good an untouched except for the contribution and transfers to the latest employer?
You have one ELSS account which is 15 years old, untouched, and growing well?
No? Start now. Never too late to start saving / investing. If your accounts are younger than that can you consider increasing the contribution? Has your salary increased far beyond? Have you been able to increase the contribution by a far higher %age? say 15% every year? I know people at age 30 saving (between H and Wife) about 100,000 per month? are you lucky to be in that class?
Do not punish yourself too hard if you have not met the targets. This is the time when you had babies, your parents needed support, your student loans had to be paid off. You went jobless for 4 months. Yes the ages 30-40 are not really the easiest to save and invest.
However if you have met your targets (or of course exceeded them) give yourself a pat in the back. The amount that you invested from 25-30 would have nicely more than doubled itself, and your retirement kitty would be looking nice and heavy. No, no do not get complacent either! You can now see the magic of starting early and the power of compounding. If you have been in the right asset classes, you can feel more confident of your retirement.
Now come to the 40-50 era. Childcare, children’s education, parent’s medical needs, vacations, big house, bigger house, cars,…possible to lose sight of the impending retirement? Well all this could be offset very easily because of increasing income, esop, foreign postings, etc. and your retirement kitty could be looking, swell !! Well starting at 21000 a month at age 40, you would have contributed about Rs. 46,69,000 to your retirement kitty. Remember all these figures look sexy, but you have to go and achieve this! This is the time when you should try pumping up your retirement kitty. If both H and Wife are earning it is not difficult to pump up this figure to almost double of this excel calculated figure.
Now put all these figures in a calculator and see how much your retirement corpus has become. You have 3 numbers to take – the 25-30 figure, the 30-40 figure and the 40-50 figure. Assume 8% return for your PPF and EPF and about 12% for your ELSS. See the impact a 4% difference is making to the corpus.
Now come to the last decade. This is the best part. Do it yourself.
See how a nice big round your retirement corpus has become. Assume that you put all the savings into elss from age 25 to 50 and you started pumping up your PPF only from age 50. See the power of equity, and of course the power of compounding.
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