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Are you on track for a great retirement? Check with this quick rule of thumb

When do you plan to retire? The longer you plan to work, the lesser will be the need to save. That’s because your savings will get more time to grow and you will spend fewer years in retirement.

There is a lot of appeal in quitting jobs early in life to pursue one’s favourite hobbies or recreation. 

However, achieving financial nirvana calls for meticulous planning to get you there. 

How much money do you need to retire?

It depends on many factors. When do you plan to retire? The longer you plan to work, the lesser will be the need to save. That’s because your savings will get more time to grow and you will spend fewer years in retirement. 

Moreover, it also depends on your lifestyle preferences after retiring. If you are planning to live frugally, your saving goal post will be lower than otherwise.

Inflation factor

And in all this, inflation factor plays an important role. For calculation purposes, we are supposing annual inflation of six percent.

One rule of thumb suggests building a retirement nest of at least 25x (times) the annual expenses at the time of retirement. 

So, for instance, if you are a 25-year old planning to retire by 60, you should aim for a retirement kitty of Rs 10.9 crore ((50,000 * (1.06^35))* 25). Thanks to six percent inflation, monthly expense of Rs 50,000 will increase to Rs 3.6 lakh at the time of retirement. And 25 times that figure is Rs 10.9 crore.

For calculation purposes, one should exclude house EMI or contribution towards other financial goals like child education and marriage from the monthly expenses. 

While Rs 10.9 crore might seem a lofty goal, you need not save all of it. Instead, invest in equity funds and let the power of compounding do the magic. 

Why 25x?

The idea is that you build a kitty large enough to generate income at least equivalent to that of your expenses (then). In the above example, a retirement nest of Rs 10.9 at the end of 35 years is expected to yield at least Rs 3.6 lakh a month at 4% per annum. 

While Rs 10.9 crore might seem a lofty goal, you need not save all of it. Instead, invest in equity funds and let the power of compounding do the magic. 

Two paths

To achieve the retirement target of Rs 10.9 crore, you could choose among two options based on your understanding and comfort with the risks associated with Equity as an asset class. Invest fully in equity funds or invest 60 percent in equity funds and rest in debt. 

By investing fully in equities, you can hope to achieve the target with lesser SIP investment than otherwise. 

If you prefer 100% equities, a SIP of Rs 1,450 (at the age of 25 years) that increases by 8 percent every year will get you there. As your income level increases, you can increase the SIP amount without a financial strain. 

However, if you are investing 60:40 in equity and debt respectively, you need to invest in a higher SIP of Rs 2,650 that increases by 8 percent every year. 

A 12 percent portfolio appreciation for 100% equity portfolio as against 9 percent for hybrid will take you towards the intended retirement savings target.

Intermediate milestones

If you are already investing in equity funds, and have set your retirement goals perhaps you might want to lean back and check if you are on track. 


As per our calculations, in case of 100% equities, by 30 years, you need to have a portfolio worth one time the inflation-adjusted annual expenses. By 40 and 45 years, it should grow to five and eight times the inflation-adjusted annual expenses respectively. 
And by 50 and 55 years, it should be 12 and 18 times the inflation-adjusted annual expenses respectively.

For 60% equities



And if you are investing 60% in equities, the targets gets steeper. You need to have a portfolio worth two times the inflation-adjusted annual expenses. By 40 and 45 years, it should grow to seven and 10 times. And in 50 and 55 years, the target will become 14 and 19 times respectively.

Learning 
By adopting equities, you can reach your goal faster or with lesser SIP investment. And by taking baby steps early in life; the seemingly lofty target comes within your reach – thanks to the power of compounding. 

Takeaway
A quick thumb rule can be far more effective than complex spreadsheets, especially when getting started. Use it to check if your retirement is on track or needs a course correction.
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