Personal Finance Musing 20: A Ready Reckoner for Your Retirement Planning
PERSONAL FINANCE MUSING 20
A READY RECKONER FOR PLANNING YOUR RETIREMENT
I will begin this post by thanking you all from the bottom of my heart. My book, “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention which went live barely 12 days back, is generating a buzz and having great sales. I know that the help provided by all of you in form of sharing last week’s blog post as also my Whatsapp link has helped tremendously. I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book.
The book continues to generate positive reviews- sample this. Krishnamachari Srikkanth; former Captain of Indian Cricket team and former Chairman of the Selection Committee, is the best of the best, in the world of cricket. At the time when the mindset of Indian batsmen was to somehow survive the onslaught of opposition fast bowlers, Srikkanth showed the way with brilliant counter-attack which sent the bowlers scurrying for cover. His scintillating knock in 1983 World Cup Finals, at Lords, is one of the most cherished memories of Indian Cricket fans. Srikkanth shoots from the hip and doesn’t mince his shots and words. He was very gracious to peruse the book, “Musings of a (financially) Illiterate father”, and had this to say.
“Anand has written a very well researched and incisive book on personal finance; highly recommended.”
These words of praise from a reputed personality like Kris Srikkanth have indeed been a morale booster. I am sanguine that this book will provide a clear roadmap for investing for many common investors like us.
Let's begin our exploration of the topic of this week's blog post i.e. retirement planning. For many readers, in their 20s and 30s, it may seem so far away. However, for persons of my age, who have less than a decade left for retirement, this is an extremely relevant topic. The first issue to debate is- where do we place retirement planning in relation to our other financial goals? As we begin to earn various goals could be- marriage, buying aspirational items like a car, foreign travel, buying a house, raising our children including their education and marriage and of course retirement planning. While everyone may have a different take on this question but I would put retirement planning right on top of the priority list, and for good reasons.
After retirement, though many expenses like on children, office related ones etc. do reduce, medical related ones go up. Secondly, you would like to travel around, do philanthropy, immerse yourself in social causes, gifts to your children/grandchildren and finally, leave a legacy for them and the society. To do all this, you need a sizeable corpus at retirement- you wouldn't like to be asking your children for money, would you? So, let’s take this as the working hypothesis and see as to how can/ should we plan for retirement. What I am going to do in this post is to give you a few models for retirement planning and discuss them in detail next week.
Model 1. This model[1] as also others which follow are premised on the fact that you can’t suddenly wake up one fine day, at 60 years of age (or any other retirement age), and check your retirement corpus. If it is too less, which will invariably be the case, you are left with no reaction time. You need markers along the way to check your financial fitness as you move on the path of your life. As per this model, someone who starts to work at 25 years of age and retires at 60 should accumulate 10 times his annual income. Let’s see it in form of a table so that it is easy to compare with other models.
|
Serial
|
Age
|
Retirement Corpus
(times annual pay)
|
|
1
|
30
|
0.98
|
|
2
|
35
|
1.80
|
|
3
|
40
|
2.78
|
|
4
|
45
|
4.02
|
|
5
|
50
|
5.33
|
|
6
|
55
|
7.26
|
|
7
|
60
|
10.12
|
The model further suggests the saving percentages at various life stages- 5% of income between 25-35 years of age, 10% between 36-50 years, 15% between 51-55 years and 20% between 56-60 years. Please note that this is the saving towards your retirement fund and not your total savings which are supposed to be much higher. I would recommend you to go through the post dated 07 Apr, on Spending-Investing (SI) balance to revisit the recommended overall saving percentages. The link is given below.
So, a person with Rs 10 lakh of gross income at 40 years of age should have saved Rs 27.8 lakh in his/her retirement fund. You can do the calculations as per your age and income. Where exactly to save/invest for retirement is another important question which I have adequately answered in my book.
Model 2. This model[2] suggests a retirement corpus which is 9.4 times your gross annual income at the time of retirement. Though not widely different from Model 1, it has few interesting similarities and departures. It propagates much smaller corpus, till age 40, but catches up by age 45, where the corpus becomes same- 4.02 times. This model thus assumes the capability of saving maximum (15%) after age 40, which is not incorrect as by that time a person is earning for last 15-20 years and has finished with his basic responsibilities like marriage, childbirth, house etc., which require upfront expenditure. Though the major expenditures of children education and marriage are forthcoming with prudent investing, he is accumulating corpus for those goals, which are still some time away.
|
Serial
|
Age
|
Retirement Corpus
(times annual pay)
|
|
1
|
30
|
0.60
|
|
2
|
35
|
1.40
|
|
3
|
40
|
2.40
|
|
4
|
45
|
4.02
|
|
5
|
50
|
5.20
|
|
6
|
55
|
7.10
|
|
7
|
60
|
9.4
|
This model too suggests the saving percentages at various life stages- 12% of gross income between 25-45 years of age, 15% between 46-60 years.
Model 3. I have already outlined this model[3] in my post of 10 Jun on “wealth steps”. Do go through the same- the link is provided below.
In a nutshell, this model talks about your “net worth” at various ages, and not only retirement corpus.
“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”
Continuing with our example of Model 1, the net worth for a person of 40 years of age with a gross annual income of Rs 10 lakh, should be Rs 40 lakh . The retirement corpus for this person, at this life stage, should have been Rs 27.8 lakh as per Model 1 and Rs 24 lakh for Model 2.
I would like you to mull over these three models and calculate your own net worth and retirement corpus based on your age and life stage. We will draw some relevant conclusions next week including adequacy of this kind of corpus.
My book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version, including Kindle, should be ready in another week. I will keep you updated in my next post. The link to go to the book is provided below.
For now, enjoy your Sunday while reading my book- you have earned it.
[1] The Times of India, 17 Jun 2018.
[2] Charles Farrell- Your Money Ratios.
[3] The Millionaire Next Door- Thomas J. Stanley and William D. Danko.
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