Do not let a retirement calculator get you down!

Published: February 9, 2015 at 11:12 am

Last Updated on August 30, 2021 at 3:43 pm

If you have used a retirement calculator, you will know exactly what the title refers to! If you have not used a retirement calculator before, you are missing out on a wonderful opportunity to get all stressed up!

Freefincal has its origins in retirement calculators. I have a wide range of sheets, the most popular of which is the recently released: Low-stress retirement calculator!

Unfortunately, many still find this stressful enough:

  • They feel that the corpus required for financial independence in retirement is unbelievably high.
  • The monthly investment required, even if we assume investments will increase in the future, is still too high.

So many have asked me, “what should I do?“, “Does this mean I can never retire?“, “Should I increase my equity exposure?“, “Should I reduce inflation and increase return expectation” and the like.

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You are not alone. After I made my first retirement calculator, I punched in my numbers and was in utter dismay. I sent it to Subra, who said, “yeah! That sounds about right!”. I started taking my retirement seriously that very day. Although I could not invest as much as I should, when I began, I soon was able to overtake my target, thanks to a combination of higher income and frugal living.

If you have same issues, here is what I think you should do:

Recognise the purpose of a retirement calculator

It is meant to shock you! It is meant to urge you to take your retirement seriously. If someone said. “invest as much as possible for retirement”, without using illustrations from a retirement calculator (such as this slide show), most people will not take it seriously.

Inflation before and after retirement is important to consider but is not the enemy. The enemy is reckless enhancement of living style (aka lifestyle creep).

So a retirement calculator, urges people (who bother to try one and  take results seriously) to reduce unnecessary expenses and invest in productive assets like equity.

At any point in life, all we can do is to invest what we can irrespective what we should. A retirement calculator is an instrument that is meant to prod you in the right direction.

Living in the moment is important but cannot come at the cost of destroying the future.

What should I do if I cannot invest enough?

You cannot invest enough today, not forever. So don’t lose heart.

Ask yourself, why?

Is it because you are spending too much?

If this is because of mandatory expenses, there is not much you can do.  See if you can increase your income soon.

If this is because you are making frivolous expenses, the solution is obvious.

 Is it because of liabilities?

If it is any loan other than a home loan, get rid of it asap.

If it is a home loan, there is no burning hurry to get rid of it, unless you want to retire early. If you invest right, your investments could earn more than the home loan rate.

Check out an illustration here: Prepay vs. invest

Use this calculator to find out for yourself.

There is no need to take an either/or stand. Begin investments and prepay in chunks. Recognise the time lost in pre-paying is more important than the psychological burden of a home loan.

Note to those who are thinking about taking a home loan: Factor in the rate at which your salary will grow. If it will only grow at a constant but steady rate (like for govt employees) or if it is likely to be volatile, try to avail a loan for only 50-60% of the real estate value.

Is it because you are not earning enough?

This means your expenses and/liabilities are too high.  So this is not different from what we considered above.

Most of us wouldn’t mind if our income increased. The problem is, that it is easier said than done.

Some of us can switch to higher-paying jobs with experience and some of us cannot.  So suggesting that we try to increase income does not help much.

If you cannot invest as much as you should

  1. It is not the end of the world. Do not lose hope. Invest what you can now. Try to increase investments each year, as much as possible.
  2. Retirement is a unique financial goal. You do not need the entire corpus when you retire.
  3. All you need is
    •  One big chunk, large enough for you to provide inflation-proof income for the first decade in retirement.
    • Another big chunk which can be invested for a decade and will provide you income in the second decade of retirement.
    • This is still a large sum of money but not as large as standard calculators project. So you might be able to pull it off with a MARGINALLY lower investment(!).
    • What is offered in this post is not a solution but a small glimmer of hope for those who cannot invest enough.
  4. The sooner you start investing for retirement, the higher can be your equity exposure, pre- and post-retirement. If you start early, you can continue to hold about 30-40% of equity investments even after retirement.
  5. Standard retirement calculators do not factor in a strategy where you hold your corpus in different buckets of varying risk-reward potential.  (see more about this here)
  6. Thankfully so. Otherwise, investors will tend to become overconfident and take retirement less seriously. More importantly one cannot factor in such a strategy decades away from retirement.
  7. If you are lucky to see a significant bull run for a few years, the monthly investment required might decrease.
  8. If you can invest as much as the calculator says you should, please ignore this post and invest away. With luck, you might be able to retire early.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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