Should You Invest For Retirement as Much as You Spend?

"How much should I invest/save for retirement?" is a pretty common question (try googling it). This question, like most other, is often asked with the expectation of a nice and comfortable answer. "Be sure to save 10-15% of what you make, for retirement" is an equally common answer. Unfortunately, nice and comforting as it may sound, such answers are often far from the truth.

Retirement planning is complicated because the corpus accumulated is not meant to be spent in one-shot like all other goals. The corpus must not only provide regular income to meet expenses, it must also grow at a rate that at least matchesinflation and must be large enough to outlive the individual. This is a tough ask. Any retirement calculation is subject to several assumptions. If these assumptions are not realistic (for example planning with inflation of 6% and equity return of 15%) then results of the calculation would appear comforting even as reality prepares a bitter pill.

retirement

Many people criticize retirement calculators as a 'academic exercise' due to the assumptions involved.Many others think that such calculators are bogus since they output a large monthly investment required for building the retirement corpus. What they fail to understand is that the aim of a retirement calculator is to make people take stock of their money habits.

If the calculator says you need to invest Rs. 30,000 a month to fund your retirement and you can only afford Rs. 15,000, what do you do? Do you say the result is nonsense, invest Rs. 15,000 and do nothing more?Do you adjust the parameters in the calculator (decrease inflation, increase returns before and afterretirement and increase rate at which investments increase each year) until the result is close to Rs. 15,000? Such an attitude is idiotic and suicidal.

A retirement calculator provides an insight into your financial life. If the calculator says you need to invest much more than you can, then the trouble could be (assuming retirement is at least a couple of decades away and other inputs are reasonable: 8-10% inflation, 10-12% equity returns etc.) with your lifestyle. You need to take a good hard look at your expenses and make two lists. One for necessary expenses (food, water, electricity etc.) and one for unnecessary ones. Get rid or reduce the frequency of the unnecessary expenses and be sure to invest the amount saved for your retirement. The primary goal of any retirement calculator is to make you do this exercise.

Getting rid of frequent unnecessary expenses and embracing a frugal lifestyle is the most important step towards financial peace and security. Everything else, investing in the right instruments, seeking returns etc., is a distant second.

If you insist on a thumb rule for retirement savings, then here is a reasonably fool proof one: Reduce expenses as much as you can, invest as much as you can, as early as you can. Your investment should roughly match your expenses (meaning they should increase at least the rate of inflation!) Even if retirement calculators indicate you need to invest less, I strongly suggest you try and invest as much as you possibly can.

Why? If you follow this thumb rule religiously then you naturally tend to keep expenses down. More importantly, adhering to the rule gives you a satisfaction that you have done your best - with regard to optimizing the amount you need. That leaves only asset allocation, diversification and rebalancing to worry about!

Do I practice what I preach? Yes. Each month I invest approximately 120% (or more) of my monthly expenses for retirement. The investment is done before I withdraw money for expenses. This is possible not because I earn a lot (that is relative. In any case an academic earns enough, but never a lot!) but because we (me and my wife) have a frugal lifestyle.

Most people dismiss this saying this is impressive but impractical. Yes I agree that in some cases reducing expenses beyond a point or investing as much as you spend is not possible. However, I am convinced that in a majority of cases it boils down to reducing unnecessary expenses. All one requires is some common sense, a sense of contentment and understand what true happiness is.

Most people misunderstand this attitude. They think this means curbing habits and not enjoying life and counter argue: 'Life is short, let me enjoy NOW!" etc. I completely agree. We should enjoy life and pamper ourselves ... from time to time. Not every month. A frugal lifestyle is one in which you prioritize expenses and have 'fun' now and then after all higher priorities are accounted for. That is neither unreasonable nor impossible. It is like most things associated with personal finance, simple commonsense.

Here is a retirement calculator that gives the monthly investment needed as a percentage of your current monthly expenses. Hopefully it might help provide an insight into your money habits. Safe to that the investment required will be much more than 10-15% of your take-home pay, since your expenses are likely to be much more than that!

Here is the direct skydrive link

You can also download the excel file, like always.

Note: the math involved is the same as a standard retirement calculator.

Related Resources: I have a set of retirement calculators for investors of all ages.

AlsoRead: Retirement Myth busting…

Note: This post originally appeared in freefincal on July 15. When I moved the blog, I lost this post and was unable to recover it. So I have re-posted the article. The re-post also allows me to check if email subscribers to the blog have been transferred correctly 🙂

 

Install Financial Freedom App! (Google Play Store)

Install Freefincal Retirement Planner App! (Google Play Store)

book-footer

Buy our New Book!

You Can Be Rich With Goal-based Investing A book by  P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!
Practical advice + calculators for you to develop personalised investment solutions

Thank you for reading. You may also like

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. 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.

36 thoughts on “Should You Invest For Retirement as Much as You Spend?

  1. bharat shah

    yes, calculator is repeat, but the post wording seems different and more appealing to me. the calculator is so simple but most effective to show anybody to make understood the importance of retirement planning with very little effort .some times people having very good income (for my standard, yours is!)after initial struggle , but started living lavishly as to compensate previous frugal life as cash flow increased,without much idea of retirement . for some joint family with lone earning member (in today's time own family with father mother) family finance discussion is just taboo , and the retirement planning is never thought off. for them this calculator will be eye opener , as I think.

    Reply
  2. bharat shah

    yes, calculator is repeat, but the post wording seems different and more appealing to me. the calculator is so simple but most effective to show anybody to make understood the importance of retirement planning with very little effort .some times people having very good income (for my standard, yours is!)after initial struggle , but started living lavishly as to compensate previous frugal life as cash flow increased,without much idea of retirement . for some joint family with lone earning member (in today's time own family with father mother) family finance discussion is just taboo , and the retirement planning is never thought off. for them this calculator will be eye opener , as I think.

    Reply
  3. AyushP306

    As always a wonderful post! I like the thought of getting rid of frequent unnecessary expenses and embracing a frugal lifestyle. Sometimes i am not able to do my best personally but this thought is always there in back of my mind. I have done my share of mistakes but then i always try to learn from it and try to avoid making the same mistakes in future.

    I also agree with getting rid of frequent unnecessary expenses and embracing a frugal lifestyle, which is the most important step and everything else like investing in the right instruments and seeking returns etc is a distant second.

    I do keep track of my monthly expenses and write it in a book on a daily basis. But after reading this post, i would really like to cut down more on unnecessary expenses. Alternatively, i am going to paste "Invest as much as you possibly can" on my room's wall so that it always reminds me to follow it. 🙂

    Reply
  4. AyushP306

    As always a wonderful post! I like the thought of getting rid of frequent unnecessary expenses and embracing a frugal lifestyle. Sometimes i am not able to do my best personally but this thought is always there in back of my mind. I have done my share of mistakes but then i always try to learn from it and try to avoid making the same mistakes in future.

    I also agree with getting rid of frequent unnecessary expenses and embracing a frugal lifestyle, which is the most important step and everything else like investing in the right instruments and seeking returns etc is a distant second.

    I do keep track of my monthly expenses and write it in a book on a daily basis. But after reading this post, i would really like to cut down more on unnecessary expenses. Alternatively, i am going to paste "Invest as much as you possibly can" on my room's wall so that it always reminds me to follow it. 🙂

    Reply
  5. pattu

    Thanks Ayush. Occasional spending is very important to remain human. An efficient overall frugal lifestyle is usually adopted only by making spending mistakes continuously and learning from them.

    Reply
  6. pattu

    Thanks Ayush. Occasional spending is very important to remain human. An efficient overall frugal lifestyle is usually adopted only by making spending mistakes continuously and learning from them.

    Reply
  7. rajanikant v gajjar

    Resp . sir
    i fully endorse your view & every word of this article.
    Did you not feel that you will appear outdated & awkward in putting ideas that are centuries old & have prooved ALWAYS right but hardly ever accepted by majority at any time?
    It shows your strength & beliefs.
    The ideas you are promoting are totally out of date in today's consumerism oriented society, but , no problem , there are persons like me who appreciate the wisdom behind it & try best to FOLLOW as much as oossible.
    one of best articles i have read in personal finance.
    Thank you & ALL THE BEST FOR ALL OF YOU THERE.
    RAJANIKANT V GAJJAR
    BHARUCH GUJARAT

    Reply
    1. pattu

      Thank you very much. Very kind and generous of you. Yes it is not a view which is popular today. However those with commonsense will definitely understand the value of frugality. Keep visiting and commenting.

      Reply
  8. rajanikant v gajjar

    Resp . sir
    i fully endorse your view & every word of this article.
    Did you not feel that you will appear outdated & awkward in putting ideas that are centuries old & have prooved ALWAYS right but hardly ever accepted by majority at any time?
    It shows your strength & beliefs.
    The ideas you are promoting are totally out of date in today's consumerism oriented society, but , no problem , there are persons like me who appreciate the wisdom behind it & try best to FOLLOW as much as oossible.
    one of best articles i have read in personal finance.
    Thank you & ALL THE BEST FOR ALL OF YOU THERE.
    RAJANIKANT V GAJJAR
    BHARUCH GUJARAT

    Reply
    1. pattu

      Thank you very much. Very kind and generous of you. Yes it is not a view which is popular today. However those with commonsense will definitely understand the value of frugality. Keep visiting and commenting.

      Reply
    1. pattu

      Thank you for your comment. The keep word in your comment is 'might'. To each his own. I am not taking any chances.

      Reply
    1. pattu

      Thank you for your comment. The keep word in your comment is 'might'. To each his own. I am not taking any chances.

      Reply
  9. Kapil Tiwari

    For some of us, frugality comes naturally. We were born in a families where the primary virtues considered were (a) education and (b) religion. We were sent to the best of private schools but never had money for any item of luxury and luxury included even a glass of milkshake in the school canteen. I got my first Levi's jeans in my final year of B.Sc.!

    In keeping with the values inculcated by the family, we have decent-enough jobs, a flat in the city (no outstanding home loan), and easy access to food and clothing. (I don't own a car because I don't need one or lust for one.)

    With frugality came the habit of saving. I may save more than half my salary.

    Now, this is where many of my ilk screwed up and real bad. We never had well defined goals, financial plans or sufficient knowledge of "investment" products/processes! While a few of us have just begun to explore and consider the avenues for retirement planning, though a trifle late, your article does offer hope that "frugality", "simplicity" and "limited wants" will come to our rescue, because of our upbringing, by default.

    Reply
    1. pattu

      Thanks for your insights Kapilji. Frugality is indeed the most important component in a retirement portfolio.

      Reply
  10. Kapil Tiwari

    For some of us, frugality comes naturally. We were born in a families where the primary virtues considered were (a) education and (b) religion. We were sent to the best of private schools but never had money for any item of luxury and luxury included even a glass of milkshake in the school canteen. I got my first Levi's jeans in my final year of B.Sc.!

    In keeping with the values inculcated by the family, we have decent-enough jobs, a flat in the city (no outstanding home loan), and easy access to food and clothing. (I don't own a car because I don't need one or lust for one.)

    With frugality came the habit of saving. I may save more than half my salary.

    Now, this is where many of my ilk screwed up and real bad. We never had well defined goals, financial plans or sufficient knowledge of "investment" products/processes! While a few of us have just begun to explore and consider the avenues for retirement planning, though a trifle late, your article does offer hope that "frugality", "simplicity" and "limited wants" will come to our rescue, because of our upbringing, by default.

    Reply
    1. pattu

      Thanks for your insights Kapilji. Frugality is indeed the most important component in a retirement portfolio.

      Reply
    1. pattu

      AK, this is one of my old posts. I just reposted it at AIFW. You must have subscribed for alerts after I posted it.

      Reply
    1. pattu

      AK, this is one of my old posts. I just reposted it at AIFW. You must have subscribed for alerts after I posted it.

      Reply
  11. Debojyoti Das

    As always, nicely described the need of Retirement planning in a short and meaningful way, Pattu. Thanks.

    Reply
  12. Debojyoti Das

    As always, nicely described the need of Retirement planning in a short and meaningful way, Pattu. Thanks.

    Reply
  13. Caesar

    Thanks for the free financial calculator. Simply superb.
    You have already provided all the required calculators for retirement planning in separate excel workbook. I tried to consolidate all the calculators into one workbook, but failed miserably(i have no clue about macros). Is it possible for you to provide a consolidated excel document based on topic(ie all the retirement calculator in one excel workbook)? or if you already made it, kindly provide the link.

    Reply
  14. Caesar

    Thanks for the free financial calculator. Simply superb.
    You have already provided all the required calculators for retirement planning in separate excel workbook. I tried to consolidate all the calculators into one workbook, but failed miserably(i have no clue about macros). Is it possible for you to provide a consolidated excel document based on topic(ie all the retirement calculator in one excel workbook)? or if you already made it, kindly provide the link.

    Reply

Do let us know what you think about the article