I don’t know the answer. For each of you it will be different. So you need to find it out for yourself.
So why this post.
Recently I was having lunch with one of my colleague who is just crossed 60. He was talking about how he had a discussion with a relative on what is needed after retirement.
So he had the following calculation:
If he needs Rs100000/- per month then he will need Rs12,00,000/- in a year.
If he is in the 30%+ tax bracket then he has to account for tax, which means he should make approximately Rs18,00,000/-.
If he has a fixed deposit which will give him 7% RoI then he will need a corpus of Rs26,000,000/-. Now since he is no where close to this figure he was getting depressed on how he will handle the situation.
For all of you who live out of India, the retirement age in India in most offices is either 58 or 60. Some jobs do have 65 as the age. Private companies do have people working after the age of 58 but that is on contract, not as a full time employee with all the benefits. Even in India the average age of both males and females has been going up every decade. In the cities especially with access to better medical treatment, the average age has crossed 70 now. Which means a lot of people in the cities will now live to cross 85.
Being an absolute optimist I highlighted a few things that were flawed in his argument.
- The tax rate is different once a person crosses a certain age level in India.
- 30% tax on the whole amount does not include the deductions which the government allows as standard to all citizens. So the taxation is rarely on all your income.
- While its good to have a large portion of your money in a fixed deposit, so that you are saved from the fluctuations of the stock market, it does not mean that you should have all your money in such low interest yielding paper. There are a lot of decently safe options which could give you safety as well as a higher rate of interest.
- You need to account for inflation especially medical inflation in India which is going crazy.
- You need to have a financial advisor who can suggest you ways to come into the lowest tax bracket.
If you were to take all the above items into account then the figure may not be the depressing number of 26,000,000/- given above. It could be almost 30-40% lower. That got my colleague a little relaxed.
Having given the above example however the fact remains that after retirement, you may want to travel across the country or abroad. How do you finance those spendings?
For an India perspective, I would suggest you read the book by Saurabh Mukherjea Coffee Can Investing. He has taken some very specific cases and built a hypothesis of how you should be investing to get to spend your old age well. At a broad level his belief is that for taking part in the stock market without risking majorly, ETFs are the best bet because they have low expense ratios(in one of my earlier post I have shown how an incremental 1-2% difference in returns because of expenses charged by mutual fund houses can impact your returns dramatically). However for the small cap stocks he still recommends using some of the renowned mutual funds.
For all my readers from the US and Canada, I will not tire of recommending Tony Robbins’ book Money Master the Game. Its a thick book but it’s a book which will give answers to a lot of your queries. Most of the so called advisors don’t answer the questions adequately well. Tony has been able to get you answers from some of the best people in the world who handle trillions of dollars combined. He has also given a perfect asset allocation breakup. Also all the advisors are very clear first on not losing money. And last they all suggest index funds again because of low expense ratios.
All of us have to retire one day. Death and taxes are the only 2 realities of life. How you manage your taxes and investments so that you live well, till you die. The earlier you start investing the better off you will be in the later stages of your life. I have been giving various examples of how compounding can do magic even if you don’t earn much – if you start early and invest in decently size returns.
Till next time then…find out how much you would need to retire and then work backwards to achieve it. Have a life.