Many people dream of a care-free retirement, with lots of spare time and enough money in the bank. This dream may remain just that if you haven’t saved enough. The road to building an adequate nest egg is full of pitfalls. Topping the list is investing less than you need to. A 30-year-old, aiming at a retirement income of Rs.50,000 a month, will need to invest Rs.35,000 a month for 30 years to live comfortably till the age of 90. Invest less than this amount and your nest egg will be finished in no time (see graphic). “Under-funding of retirement corpus is a common problem. People don’t realise this until much later, when money starts running out,” says Abhishek Kumar, Founder & Chief Investment Adviser, SahajMoney.
No more nudges
It is here that compulsory savings play an important role. The mandatory monthly contribution to retirement plans, such as the Employees’ Provident Fund and the NPS, means that salaried people are putting away at least 12% of their income towards retirement. Add to this the tax-saving investments under Section 80C, which force many people to put away money in long-term investments.
However, not all salaried people are covered by the EPF, nor is everyone contributing 12% of basic pay to retirement fund. An increasing number of people are consultants like Nagarajan, who are not on the payrolls of the company. Some of those who are covered opt for the minimum contribution of Rs.1,800 to the EPF in the quest for a fatter take-home pay. A survey by Bankbazaar. com says that money channelled towards retirement goals has come down in recent years. The percentage of savings allocated to retirement dropped significantly from 45% in 2022 to 38% in 2023. This decline came at a time when the liabilities were rising. According to the RBI data, annual financial liabilities of households touched 5.8% of the GDP in 2022-23, compared with 3.8% in the previous year.
Shriya Nagarajan
25 years, CHENNAI
Years to retirement
25 years
Target corpus
Rs.10.5 crore
Required income
Rs.60,000 per month
(current prices)
Existing retirement savings
Rs.1 lakh
(hybrid mutual funds)
Monthly investment
Nil
Her current expenses are very high and leave her with nothing to invest for retirement. If she wants to retire at 50 and also maintain her current lifestyle, she will need to invest almost Rs.80,000 a month, which is more than her current income. She must cut her expenses by half and use the savings to build her retirement nest egg.
How long will your money last?
To get a monthly income of Rs.50,000 at today’s value, after retirement at 60,a 30-year-old must build a corpus of Rs.7.5 crore to sustain inflation-adjusted withdrawals till the age of 90. Assuming 10% blended returns, he will need to invest Rs.35,000 a month to reach this target. A lower investment will mean he will run out of money in retirement.
The new tax regime only promises to make things worse by removing the annual nudge to make tax-saving investments. With no tax deduction for investments, there is no need to save.“The reduced incentive to save in the new tax regime means lower savings and, later in life, more financial problems for most people,” says Dhirendra Kumar, CEO of Value Research.
Also read: Retirement planning: How to be tax-efficient in retirement
Underestimating inflation
How much do you need to save per month? It depends on your current expenses, expected return on investments, and inflation. Inflation is the biggest enemy of the retiree. Unlike salaried people, whose income rises every year, the income of the retiree is fixed while the prices of goods and services keep rising.
Experts advocate using a reasonable inflation of 6-7% while calculating your retirement needs. It’s better to err on the side of caution because even a small miscalculation can upset the planning. If you consider 6% inflation in your calculations, but the actual inflation turns out to be 7%, the required income 30 years later can be 30% more than you planned for. Keep in mind that the inflation rate is determined by your own expenditure basket, not by the average headline numbers appearing in the media.
Calculate your total annual expenses, not only on essentials like groceries, utilities, medical insurance and treatment, and rent, but also on gifting, travelling and leisure. “A premium of 20-25% needs to be added to the annual expense estimate, considering the lifestyle changes that may occur over the period,” advises Mimi Partha Sarathy, Founder and Managing Director, Sinhasi Consultants.
If you don’t want to get into a maze of numbers, here’s a simpler calculation provided by Financial Planner Karthik Jha. He says a person whose retirement is 30 years away must invest about 80-85% of his current monthly expenses. Those who start saving in their 40s will need to invest about 120% of their expenses, while those in their 50s will have to save 200% of the amount. “The required amount keeps rising because the number of years left to build the corpus also reduces,” he says.
Aniruddha Bose
41 years, DELHI
Years to retirement
17 years
Target corpus
Rs.1.75 crore
Required income
Rs.32,000 per month
(current prices)
Existing retirement savings
Rs.23 lakh
(mutual funds, EPF, NPS)
Monthly investment
Rs.38,000
The targeted income of Rs.32,000 a month is quite low and barely 20% of his current monthly income. His existing savings for retirement are low, mainly due to the purchase of a house and delayed start. Though aggressive savings have put retirement on track, it is at the cost of other goals. After paying a Rs.90,000 home loan EMI, he has nothing left to save for his daughter’s education.
Medical expenses will rise
The worst thing about inflation is that the cost of medical treatment and health insurance will take up a bigger space in the monthly expenses of the retiree. Medical inflation is rising at a much faster clip of more than 15%, compared to the average consumer inflation of 5-6%. Planning for potential health issues and long-term care needs is, therefore, critical. Mahavir Chopra, Founder, Beshak.org, offers a three-pronged approach. One, buy inflation-factored comprehensive coverage (Rs.15 lakh per adult) as soon as possible, at least before hitting 30. “This will ensure you don’t suffer co-pays or waiting periods when you are old,” says Chopra.
The other concern young people have is around skyrocketing premiums and unaffordability during old age. To counter this, opt for a super top-up (high deductible) cover of Rs.5 lakh per adult, along with a base plan. Lastly, youngsters should also save separately for routine non-hospitalisation (OPD) healthcare costs when they plan for retirement. They will need to pay for OPD expenses for more than 20-25 years.
Jagriti Tewari
31 years, MUMBAI
Years to retirement
34 years
Target corpus
Rs.11.6 crore
Required income
Rs.90,000 per month
(current prices)
Existing retirement savings
Rs.11 lakh
(equity mutual funds)
Monthly investment
Rs.15,000
The purchase of a house has drained all her savings. The monthly investment of Rs.15,000 in stocks is not enough to reach the targeted Rs.11.6 crore retirement corpus. She needs to raise this to around Rs.20,000 per month. Other goals, such as a new car and a second home, should be deferred until her retirement target is on track.
Another common mistake is life expectancy. The average Indian is expected to live till 71, but a middle or upper middle class person in an urban centre, with access to good medical care and enough health insurance, is likely to live much longer. A person with normal health should, therefore, target a life expectancy of 85-90 years, and plan accordingly. “Have a margin of safety fund as you can live longer than expected,” advises Chennaibased Investment Adviser Sridevi V.
Avoid big commitments
Investing for retirement can be difficult if one has too many other financial commitments, especially big-ticket home loans. Meet Aniruddha Bose (see picture), who is not able to put away much towards his retirement savings because of a Rs.90,000 home loan EMI. “I should be saving more for retirement and for my child’s education, but the home loan EMI has greatly restricted my ability,” he says. Budding entrepreneur Jagriti Tewari is in the same boat. Last year, she and her husband emptied all their savings to buy a house. Though the EMI for the Rs.75 lakh home loan is manageable, she allocates only a paltry Rs.15,000 for her retirement.
When a substantial portion of one’s savings goes into debt repayment, savings are put on the backburner. Therefore, avoid debt that curtails investments for other goals. “Buying a house in the early years of your accumulation phase, when you have just started earning, is one of the worst financial planning mistakes you can make,” says Vivek Banka, Co-Founder, GoalTeller. Remember the golden rule: home loan EMIs should not be more than 50% of income, while net savings, after all expenses, and EMIs should not be less than 20%.