A reader wants to know, “Can I find out how much I need to invest for retirement without a calculator? Is there any thumb rule for this? Similarly, can I determine how much equity exposure I can have after retirement without a calculator?”
We will discuss the first part of his question in this article – Can I find out how much I need to invest for retirement without a calculator? – and discuss the second part in a follow-up article.
Any thumb rule is the result of repeated use of a calculator. Still, it cannot provide a contextual answer taking an individual’s circumstances and should only be used as an approximate guideline. In this day and age, using a proper retirement calculator only takes a few minutes. So, there is no benefit in using a thumb rule, which could be an overestimate or underestimate for a specific situation.
The following suggestions are only applicable to those below the age of 30. The younger the individual, the better the relevance. Older investors can DIY with our robo advisor tool or consult a professional from our List of Fee-only Financial Planners in India (SEBI RIAs).
A simple thumb rule for retirement planning
- Each month, find out your monthly expenses. If you are spending some money on your parents or relatives, remove this amount. If you have children, remove their expenses. Do not include any EMIs or expenses that you think will not continue when you retire. Call the effective sum X.
- From now on, you need to invest each month, at least until you retire, a minimum amount of Y = 75% to 100% of X. Each month, each year until you retire. If X = 30,000, you must invest Y ~ Rs 23,000 to Rs 30,000 (preferably more!)
- The total investment made for retirement includes EPF contributions from you and your employer (excluding amt sent to EPS). The same is true if you have NPS.
- If you can hold Y = X no matter how your expenses increase over the next 10-15 years, you will have built a strong platform for your retirement.
- Those below 30 can (well, must!) invest about 60% of Y in equity (stocks and mutual funds) and 40% of Y in fixed income (EPF, NPS, etc.). This asset allocation can be maintained for about 7-10 years before tapering of equity is necessary.
- We recommend increasing Y by at least 10% annually (assuming your expenses do not increase as much!)
- If you can manage only Y ~ 75% to 100% of X, then you should be on course to retire by age 55-60 with financial independence (assuming there is enough equity exposure in the portfolio)
- If Y = 2X or 3X or 4X, then early retirement by 40-50 is possible. This means you stop being salaried and start working for yourself.
- This simple thumbrule will work whether you work in IT or not. Whether you have onsite opportunities or not or whether you are an Indian or a non-resident Indian.
- If your Y < < X, then do not give up. Work hard to increase your income and ensure your expenses do not proportionately increase. Invest as much as you can, but track your investment more rigorously than their current market value and try to increase it gradually. Remember, for most people (including me), Y <<< X when starting. We can change the equation with focus, determination and discipline.
Happy investing!
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