Do not be scared by what you need to accumulate for retirement!

Published: August 2, 2016 at 5:50 pm

Last Updated on

We had discussed Why the retirement corpus we need is so large in an earlier post. Using a retirement calculator for the first time can be a nightmarish experience. Many users have complained that the low-stress retirement calculator is low-stress before using it and high-stress after!

I would like to think much of this stress is due to a lack of understanding of how a corpus grows over time.  Although investments in volatile asset classes do not compound like a fixed deposit, their growth can be represented as such. As long as we understand that the return assumed is the average considered over the period of investment, and not the one obtained each year, it should be okay.

Suppose my retirement is 25 years away and my target corpus is 15 Crore. This is not the number I should be scared of. For an average portfolio return of  10%, the monthly investment  I need to make is Rs. 46,148 in the first year and increasing at 10% each year.

If I can manage to invest this much – initially and also manage the increase of 10% a year, I see no reason to be scared or worried. If I cannot, then I will need to review the inputs. Remember, any calculator is only as good as its inputs.

This the standard compounding graph for the scenario mentioned. Notice how small the total investment is, compared to the corpus achieved. So much of the corpus is via the growth of the initial investments. 
Retirement-corpus-1

Now for the key graph. This is the percentage of the target corpus (15 Cr) achieved vs the no of years invested.

Retirement-corpus-2

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Notice that it takes 20 out of 25 years (80%) to achieve 50% of the target corpus. The remaining 50% (7.5 Cr) comes in the next 5 years!!

So the key is to

  • start investing early
  • invest as much as possible
  • invest with a risk management strategy
  • invest without worrying about the target

If we invest with discipline and a plan, we will get there. Use  the low-stress retirement calculator without fear or stress. You can also use the android versions linked below.

Moral: Growth of a corpus is a non-linear process. It cannot be imagined. So do not try to and get stressed after using a retirement calculator!

Related post: How people react to a retirement planning calculation

 

Do share if you found this useful
Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!)

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
   

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)  

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

10 Comments

  1. Timely article. Last weekend had a intense discussion with my uncle (54 years old) about his retirement needs and the there was literally panic, disappointment.

  2. Timely article. Last weekend had a intense discussion with my uncle (54 years old) about his retirement needs and the there was literally panic and mixed feelings of sadness, disappointment. Have decided to start a SIP of Rs.10k before this Friday, in equity MF and increase it later in a month after more thorough data. Will be helping him with your calculators. Thanks.

    1. please do not invest any amount in equity that is necessary in the first 15 years of retirement.

  3. For retirement, Is it a good idea to invest in property and earn rental income. If you have already discussed this in a previous post do share that link.

  4. If he has only 6 years till retirement, you might be doing him more harm than good by starting a SIP now. There is no guarantee how equity will perform over such a short term. Your uncle is already in a panic state and if market doesn’t perform as expected, his heartbeat will go through the roof.

  5. If property investment is not desireable then, are Equity and Debt MF the only options for investment ? If that’s the case then would Equity and Debt MF be sufficient to sustain through the remainder life period. I’m expecting to retire in another 19-20 years @ 60 years and continue to live through till 90 years.

  6. Yes, The amount allocated to be invested in equity MF is done with this mindset: 20+ years; it is not going to be come back / donating it / gone (It is a bit extreme but anyways to simulate this mentality and it kinda …works) :

Comments are closed.