Accumulating a corpus for retirement is difficult. The reasons are not far to seek – not really knowing how much you need, not knowing the returns that you will get….etc. etc. However let us assume that this couple aged 34 years have figured it out that they need Rs. 10 crores for their retirement at the age of 60 years.

Currently this couple has Rs. 10 Lakhs earmarked for retirement. Not a big number, but hey they are young too. So what is their funded Retirement Ratio? It is 10L/10 crore = 1%. Now the best thing for this couple to do is monitor this “Funded Retirement Ratio” and track it through thick and thin over the next 25 working years. Whenever they get a lumpsum gift or bonus, they can decide to spend, repay some loans or beef up the ratio.

This couple is saving about Rs. 30,000 per month for Retirement and are also paying Rs. 190,000 per month as EMI for their aggressive home loan. They are confident of upping their retirement contribution as soon as they repay the housing loan.

As the couple in the example above makes ongoing contributions over time, increasing the account balance, the funded ratio will keep increasing. In fact, even if no contributions are made, this funded ratio should still rise over time, simply given the growth in the portfolio itself, and by just ‘not removing’ the ratio will improve.

The virtue of this approach, though, is that instead of talking in terms of absolute numbers – which don’t make you feel responsible to a goal – the funded ratio gives a good sense of progress.  Most people’s goals  – aren’t easily conducive to calculating progress. While it might be relatively easy to find out that Rs. 3,50,00,000 out of a Rs100,00,000 goal is 35% progress, most people can’t calculate in their head that if their retirement goal is actually Rs 1.35 Cr, that it takes about Rs 4,750,000 to get to the same 35% funded ratio.

The funded ratio also helps put market volatility into context. It stops you from just looking at the rupee magnitude of a bear market decline, or the percentage draw-down, and relates it back directly to the goal. So if you had reached  35% of the goal in say 2022, and the market falls by 10%, you do not have to worry about the 7000 point fall, if your retirement funded ratio is down to just 32%. So it helps put lots of things in perspective.

It has a limitation too. The impact of compounding is DRAMATIC towards the later stages – so if you require 10 crores at the age of 60, at your age of 50, you may have reached only 36%. This might scare you. You should not be scared even if it is just 30% at age 50. It is the last few years when your contribution, and the power of compounding will both kick in. Again that gives you a good perspective. If at age 57 you have reached your GOAL, you can re-allocate to a even less volatile asset allocation!

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  1. May be you should have advised them out of the 2 crore home loan first. Insane. 190K EMI on home loan – simply insane.

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