My expenses have increased tenfold over 20 years – will I have enough when I retire?

Published: April 20, 2023 at 6:00 am

A reader says, ” Thank you for the Robo Advisory Tool. It has given me insight into my retirement plans. A query: As we can recall, monthly expenses during the year 2002 were approximately Rs.10,000/- p.m. In 2022, our expenses escalated to Rs.1,00,000/- p.m. (in 20 years)”.

“The Retirement Corpus calculated in the year 2002 may be Rs.10000 X 12 = Rs.1,20,000 X 40 (times) = Rs.48,00,000 (Forty-Eight Lakhs). However, in today’s scenario, Rs.48,00,000/- is much less.”

“If the person having Rs.48 lakh retirement corpus would have retired in 2002 at the age of 50 years, considering at that time that he had sufficient money to survive till his age of 85 years, it is so scary just to imagine as to how he will survive today in 2023 (he must be 71 years of age) and still 14 years to go till his age of 85 years, with such a small corpus and withdrawal of some amount every month.”

The reader’s email can be summarised, “my expenses have increased tenfold over 20 years – will I have enough when I retire?”

A tenfold expense increase over the last 20 years corresponds to an inflation of 12.2%. Much of this should have been due to lifestyle changes and not due to the actual inflation of essential expenses.

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If any retiree insists on increasing expenses at the same rate, it would be impossible to plan for retirement unless the corpus is copious.

As regards, “The Retirement Corpus calculated in the year 2002 may be Rs.10000 X 12 = Rs.1,20,000 X 40 (times) = Rs.48,00,000 (Forty-Eight Lakhs)”.

This calculation is not wrong, but it hides an assumption. Assuming the retiree withdraws an income indexed to inflation and the rest is allowed to grow, a 40X corpus will last for 40 years if the real return after tax is zero. That is,  the inflation and post-tax corpus return are the same.

If someone insists that inflation should be 12%, it would be nearly impossible, even 20 years ago (when PPF rates started their downward trend), to general a reliable overall corpus return of 12% after tax.

Retirement planning is for lifestyle maintenance. It is meant to maintain a person’s current lifestyle at nominal inflation. It cannot, under normal circumstances, handle lifestyle creep well Unless a person has enough capital to invest more and more as her lifestyle increases.

Most investors can only handle 6% inflation before or after retirement regarding how much they can invest.  At 7% inflation, the investment will rise sharply, and at 8%, it would prove too much. When we recommend 6-7% inflation after retirement, that is, in reality, a message: be mindful of how much you spend after retirement!

Now that 40X estimate of Rs. 4.8 lakhs for an initial monthly expense of Rs. 10,000 is reasonable if not fool-proof! Assuming a post-tax return of 6%, which is reasonable between 2002 to 2022 (at least for most of the time!) and inflation of 8% (again reasonable for the time period), the corpus will last for 30 years or until the person turns 80. If the overall return is a bit higher, say 7%, the corpus will last for 34 years (close to age 85).

But what about lifestyle changes during this period? What if the retiree suddenly incurs higher expenses? There are only two ways to combat this:

  1. If the initial corpus is high enough, invest at least a small portion in equity. This is an illustration: Retirement plan review: Am I on track to retire by 50? This illustration was created with our robo-advisory tool.
  2. If the expenses suddenly increase, cut down on other expenses where possible.

Further reading: What inflation rate should I use while planning for retirement?

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