How to save Rs. 7 Crore for Retirement in India without taking risk?

In our last article we had learned about a plan to achieve our financial freedom. One of the foremost aspect about retirement planning is to determine how much money you might need for retirement. Having solved that problem, we have to move on to the next level- how to achieve this goal?

 

You may think that a fatter income package would help you to achieve the goal faster. In reality, you would achieve the golden nest faster if you base your retirement projections on your level of spending rather than on your income.

Having said that please note that your spending pattern in retirement will be certainly be different than your spending now. In retirement, for example, you may not have a mortgage payment. Your children may have grown up and living on their own, and you'll no longer need to support them. Costs related to childcare, commuting costs, partying cost will also dissipate. However, you have to account for other kind of expenses which may be a bigger concern, e.g. Medical expenses. You may also choose to travel more, owing to free time to explore hobbies that you couldn't pursue during your working years. Incidentally all these expenses will be covered by the magic formula of saving 25 times your current level of spending which we discussed in the last article. We now have to devise a plan to achieve the financial freedom.

The simple way to early retirement is to aggressively contribute to your golden nest accounts. In other words, save more and save harder.

In our school days you would have come across the quote “Little drops of water make a mighty ocean”. This quote teaches us a very important lesson about life. Yes, it implies how “PATIENCE “can reward us to achieve the financial freedom. The little things you do today will yield bigger fruits for you someday. The saying “a journey of thousand miles begins with a step” also conveys the same meaning. Start something small today and someday it will benefit exponentially.

Take for example, you are saving a measly sum of Rs 5000 every month starting from your first salary day and if you keep saving it for next 35 years, it could reward a big sum. Assuming a reasonable return of 15% compounded annually from mutual fund, it could fetch more than 7 crores at the end of 35 years. If you aggressively save Rs 10,000 every month then it could return nearly 15 crores in 35 years with the same rate of return. In the last 3 decades or more well managed mutual funds in India have returned more than 15% CAGR and we can safely assume it could return at least 15% in the next several decades to come.

Starting late on the path to financial freedom can be a fairly daunting task. It is going to take some determination and more contribution to the nest. Assume that you missed the bus at the age of 25 and decide to start at 40 years. What amount is needed now to stay afloat for the same retirement plan of achieving 7 crores by 60 years?

You have to contribute a lumpsum of 35 Lakhs at 40 years and continue to save Rs 5000 per month to achieve the same goal. Alternatively, you may have to contribute around Rs 50,000 per month till the age of 60 to bridge the gap. That’s the penalty you have to pay for a late start.

Having understood the way to achieve the goal, let us concentrate on the crux of the problem which is saving. In order to save you have to first map down your expenses.

Once you map our spending pattern, it is much easier to cut down on the wasteful expenses. To make those cuts, you have to first start with the big expenditures first. Usually it’s on rent and mortgage payments. You will have to check if you can lower your rent or mortgage payments by refinancing or moving to a smaller apartment or living with your parents. Typically, you will have to bring down our rents to about 15% of your salary. Ideally, rents and repayments (which include repayment of vehicle and apartment loans) should not exceed 40% of your salary. This exercise should help you to save at least 15% of your salary and add it to your retirement nest.

After this exercise it is necessary to automate investments. Money lying in the bank account is said to be liquid cash which means it gets spent easily. Automating investments helps staying on a financial track as it ensures that you don’t miss that monthly investment schedule.

Once you have built this process it is relatively easier to grow our money. You can start investing systematically to grow your money to join the millionaires club.