This article is written by Dr Vikas V Gupta, CEO and Chief Investment Strategist at OmniScience Capital. He believes that “Chasing Alpha leads to Risks and Chasing Safety leads to Alpha”. Check out smallcases created by OmniScience Capital.

The first step to planning your retirement is to determine your current expenditure levels. From that, you can reduce the necessary expenses like commuting, children’s education, and so on. Once that is done, assuming that your children will be working and supporting themselves by your retirement, you probably need to account for yourself and, possibly, your parents.

Let us say that the current level of expenses based on the above analysis is CurX. The next step is to assume a level of inflation, Inf. While, historically, long-term inflation in India has been around 7%, more recently it is around 5%.

Most people assume that they will retire at 60, but most people would be quite fit until 70 and live up to 95 or so. If you cannot save a Retirement Corpus, RetCor, which will last one to 95 yrs of age, then you might have to plan on working longer.

We will also assume that you invest 100% in equities or allocate a significant investment to equities. Some people assume that equities deliver 15% returns on a CAGR (compounded annual growth rate) basis. Some assume that they deliver 12% CAGR, and some 10% CAGR. To be conservative, we will assume a 10% CAGR.

You also have to make an assumption about how much you will save per month. Ideally, you should fix a percentage of your salary. As your salary increases over the years, the saving amount will also increase in the same proportion.

Now you have all the pieces of the puzzle. 60 minus your current age gives you the number of years you can save. Suppose you spend Rs. 1 lakh per month, so annually CurX = Rs. 12 lakh. Let’s say you are 30 yrs old. You have 30 yrs to retirement. 

The first question is, how much will your RetX, annual spending at 60 be, assuming your lifestyle will be the same as today. The annual inflation Inf is 5%. 

We can use the rule of 72 to make approximate calculations.

Returns (%) X No. of years = 72

So if inflation is 5%, then the amount required will double in 14 yrs. Since you have 30 yrs to retire, it will double twice, 2X2= 4 times.

RetX = 4 X 12 = Rs. 48 lakh or nearly Rs. 0.5 cr

What kind of corpus do you need to generate Rs. 0.5 cr annually? If it was all equities with 10% annual returns, it would require Rs. 5 cr. Since you are going to live for 35 more years, the inflation during that period will require that you need 5% more money annually from your corpus. Without getting into the calculations that would require excel spreadsheets and some mathematical formulae, we can assume that a corpus around Rs. 10 cr by 60 would be sufficient to last you for a lifetime.

Again, without getting into the complex mathematics, an equity allocation of Rs. 10,000 to Rs. 12,000 per month, which increases by 10% every year, would build a corpus of around Rs. 8-10 cr in 30 yrs’ time. 

If you have less time, then you will have to significantly increase the monthly investments. And, if your spending level is less, say Rs. 50,000 per month, instead of Rs. 1 lakh per month, then you will require half the corpus estimated above.

Let us say, that if you are in your 20s or 30s, then you should save Rs. 10,000-15,000 per month. If you are in your 40s, then you should save over Rs. 50,000 per month. If you are in your late 40s or early 50s, then save over Rs. 1 lakh per month. If that is too high, then you need to reduce the level of expected lifestyle expenditure at retirement.

Also, according to these calculations, you have to invest all of it in equities. For the retirement corpus to last through your lifetime of up to 95 would require that it would have to be invested in equities. 

The above is not investment advice or retirement advice. Your financial planner and investment adviser are best suited to give you based on your specific, individual circumstances. Or you can learn about it and do it on your own. What is important to understand is that each person’s requirements, constraints, circumstances, and investment goals are different. How much they can save, their risk tolerance and asset class also differ.

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Vikas Gupta

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