Friday, August 28, 2009

How much should I save for retirement?

You retirement amount is a combined factor of the lifestyle you want to live during your retirement,your current age and the age at which you wish to retire.
Lets say you are 30 years old,have monthly expenses today of Rs.15000 pm and will retire at age of 60.
Lets assume in Indian scenario, inflation stays at 6% and your savings grow at 9% (if you make more the better)
To live the same lifestyle,you will need approx Rs.90000 pm after 30 years [ FV(6%/12,360,0,-15000) ]
Lets say you will leave another 20 years without any health problems.To live financially independent you will need approx 1.8 crores (this is being too optimistic that you dont face hospitalisation expenses from your savings)
To save 1.8 crores in 30 years, you need to save at least Rs.10000 pm, compounding it monthly (or annually) at 9%
FV(9%/12,360,-10000)
If that looks easy to you,remember it requires discipline to save that amount and invest it every month growing at 9%. If thats not possible,may God save you!

Even if you do the above, at the end of it,you will just be able to sustain yourself.
The question is do you want to live that way in retirement?
I leave it to you to find the answer. Should you need my help feel free to mail me.

3 comments:

Nigel said...

hi shailesh. nice. have some questions though...

what abt these other financial goals..how do we factor it into your equations..
1.marrige 2.children 3.house 4.car 5.health n other insurance 6.yearly vacations

cheers nigel

traderslash said...

Good Thinking Nigel.
The answer and the approach is simple.
Just like you planned the amount for retirement, you plan the amount every month to be put aside for each of the items in the list you mentioned.
e.g., Marriage - Advance planning on how much amount you need for the marriage.
Of course you cannot save your entire marriage budget if you plan your marriage in a year or two.
If you are taking a loan, consider how many years are you goingto pay for the loan and when you are doing that how its going to affect your other goals (i.e items on the list) , will you be able to save for them ?

Children - Plan in advance with your spouse how many children you would like to have.
consider amount of expenditure today on each child food, clothes, education etc (You may get an idea from your peers or siblings),
Again it is subjective to the kind of eductaion and upbringing you wish to give to your children and the amount you intend to spend for that. Factor in inflation costs projecting the number of years when you would be in that stage.

House/Car/Vacations: Again , put a value to each of the items and the time frame when you want to attain it.
Once you have the target value and time frame in mind, you will be able to calculate how much you need to put aside for each item.
There may be a few upsets here n there, but with a plan you would know how much you are on track.

Health/Insurance : You agent will be able to tell you on the amount of insurance you need and the premium amounts.
So this one's pretty simple as you know how much amount you need to put aside for your health/life insurance.

Cheers
Shailesh

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