One of the thumb rules for retirement is to have “30x” your expenses at age 65 so that if you live till 95, you have all the expenses provided for. This is of course assuming that the return that you get post expenses and taxation is enough to cover inflation, and you do not lose any money.
Sadly ‘knowing’ does not mean ‘applying correctly’. So when I say a person will need Rs. 3 crores for retirement, some people do a calculation and say No, it will be only Rs. 1.3 crores. Great.
Remember no thumb rule will work if the basic assumptions go wrong. If a person retires at 40, he will need 60X his expenses. Simply because he could live till age 100. I am sure it will not be 60x, it will be less, but the way to look at the 30x rule is to look at the number of years remaining.
People make benign assumptions like 5% inflation, 7% post tax portfolio return, zero sequence of return risk, no sudden drawdowns, client (ifa) will SURELY die at age 80, …EVEN though their own grandma staying with them is 94 going strong.
Please understand in a Retirement calculation you do not know the following:
- how long will you live
- what will be the return on your blended portfolio
- whether you will be fit to handle a complex portfolio, and how well.
- your ability to ensure that you do not lose money to poor investment skills
- how much you will spend on medical care
- how much you will spend on support staff as your body can’t do some things
- what if portfolio return is much lower than INFLATION?
- For long times the market can remain IRRATIONAL
- what if you live till 115 instead of 85 (point 1 is being quantified)
So thumb rules do not always work perfectly – which means if run into sequence or return risk, or bad investments, or ……so stop USING thumb rules..unless you know how to apply it. Thumb rules are thumb rules, that is all.
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