Over the last ten years, we have witnessed a big shift in how young earners manage money. Investing is getting popular instead of saving. Many more think of future money management (a better-sounding phrase than “retirement”) earlier than ever. However, not all of them sit down and do a proper retirement planning exercise. Here is why this is essential.
Let us do a ballpark retirement planning estimate. For a full calculation with existing investments and post-retirement income sources, you can use the freefincal robo advisory tool.
| Current age | 25 |
| Anticipated post-retirement rate of return (post-tax) | 6.00% |
| Current expenses per month (annual/12) | 30,000 |
| No of years you expect to work (retirement at age 55) | 30 |
| Expected inflation throughout your lifetime | 6.00% |
| Estimated years in retirement | 30 |
| The average rate of return expected from all asset classes (post-tax) until retirement | 9.00% |
| The annual increase in the monthly investment you can manage | 5.00% |
Result: Monthly investment needed as % of current expenses: 74.92%
So the 25-year-old should invest at least 75% of her current expenses of Rs. 30,000. This investment included mandatory EPF/NPS contributions.
Now let us find out the cost of delay.
| Delay by (years) | Monthly investment needed as % of current expenses |
| 1 | 78.49% |
| 2 | 82.31% |
| 3 | 86.42% |
| 4 | 90.85% |
| 5 | 95.64% |
| 6 | 100.83% |
| 7 | 106.48% |
| 8 | 112.64% |
| 9 | 119.39% |
| 10 | 126.82% |
| 11 | 135.04% |
| 12 | 144.17% |
| 13 | 154.37% |
| 14 | 165.85% |
| 15 | 178.87% |
Not only will the investment required increase alarmingly, but the expenses would also increase yearly! So, financial independence after retirement will become increasingly harder unless your salary can keep pace. Another problem is our risk-taking capacity. We cannot recommend someone over 60 to go overboard on equity to compensate for time lost.
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It is, therefore, crucial for young earners to take a few minutes and plan their retirement. See, for example, A simple thumb rule for retirement planning. They should do their best to (1) invest at least 75% to 100% of their current expenses (including EPF/NPS contributions) and (2) aim for an asset allocation of 50% to 60% equity and the rest in fixed income.