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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

HowtosaveRs10croreforretirementwithout
takingtoomuchrisk
ByBabarZaidi ,ETBureau | 30May,2016,11.16AMIST

ThefirsttimeArjunAmlaniusedanonlinecalculatortoassess
hisretirementneeds,hesufferedastickershock.TheMumbai
basedfinanceprofessional,whosegrossincomewasaround
Rs10lakhayearatthattime,neededmorethanRs8croreto
fundhisretirementneeds."Yes,itwasafuturisticfigurebutthe
eightdigitnumberwastoohighandtooscary,"hesays.
Thisishowmucha30yearold,

Indeed,thefiguresthrownupbyexcelsheetsandonline

spendingRs50,000amonth,will

retirementcalculatorscanbeintimidating.Here'sanexample:if
yourcurrentmonthlyexpensesareRs60,000,evena

needtofundhisretirement.Findout
howtoreachthisfigure.

conservative7%inflationwillpushupthatmonthlyrequirement
tooverRs4.6lakhin30years.Tosustainthoseexpensesfor
20yearsinretirement,youneedacorpusofRs9crore.Tosomeinvestors,suchenormous
figuresseemsounattainablethattheyjuststopbotheringaboutretirement.
That'samistake.Retirementcannotbewishedawayandeveryonewillstopworkingoneday.
Thepaychequeswillstopcoming,butyourlivingexpenseswon'tendbutkeeprisingdueto
inflation.Worse,someofthemorecriticalexpenseslikehealthcarewillbegrowingfasterthan
theoverallinflation.Thesooneryoustartsavingforthatphaseoflife,themorecomfortable
yourretirementwillbe.
Thebigquestionis:howcanonebuildaninefigurenesteggwhenthemonthlysurplusis
barelyRs15,00020,000.MutualfundsellerswillclaimthatanSIPofRs15,000cangrowtoRs
10crorein30years.Butthiscalculationassumescompoundedannualreturnsof15%forthe
next30years.It'snotadvisabletobaseyourretirementplanonsuchoveroptimistic
assumptions.Lifeinsuranceagentswillofferinsuranceplansthatwillgiveyouanassuredsum
onretirement.Butthereturnstheywillgeneratearetoolowandtheamountrequiredwillbetoo
high.AnendowmentpolicythatgivesRs10croreafter30yearswillhaveanannualpremium
ofroughlyRs12lakhorRs1lakhpermonth.

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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

Smarttipstoboostretirementcorpus
1.Don'twithdrawyourEPFbuttransferitwhenyouchangejobs.Thisshouldbeapriorityat
thenewworkplace.
2.AutomateyoursavingsbytakingtheSIProute.Thisway,evenifyouforgettoinvestone
month,yourbankwon't.
3.Wheneveryougetaraise,allocate1520%oftheadditionalincometosavings.Youwon't
evennoticetheoutgo.
4.Don'tdipintoyourPFforyourchild'seducation.Takealoaninstead.Ithelpsinculcatethe
savinghabitinthechild.
5.Erronthesideofcautionbyassumingconservativereturnsfrominvestments.Forequities,
12%isreasonablewhiledebtwon'tgivemorethan8%.
6.Monitoryourretirementportfolio'sperformanceevery23yearsandtakecorrectivestepsif
required.Equityinvestmentsshouldbereviewedeveryyear.

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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

Increasingtheinvestment
WhenAmlaniusedthecalculator,hismonthlyincomewasaroundRs85,000andheneededto
investalmost20%ofthisonlyforhisretirement.Morethanayearlater,hisincomehasgone
upandsohavehisexpectations.ThecalculatornowsaysheneedstosaveoverRs10crorein
thenext27years,butAmlaniisnotworried.IfhecontinuesputtingmoneyinhisProvident
Fund,PPFandequityfundsasplanned,itwon'tbedifficultforhimtoreachthetarget.
There'snosecretsauceinAmlani'sretirementplanning.Allhehastodoisincreasethe
quantumofinvestmenteveryyear.Ifa30yearoldwithamonthlysalaryofRs50,000starts
saving10%(Rs5,000)forhisretirementeverymonthinanoptionthatearns9%peryear,he
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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

willaccumulateRs92lakhbythetimeheis60.Butifheraiseshisinvestmentby10%every
year(inlinewithanassumedincreaseinincome),hewouldhavesavedRs2.76crore.Delhi
basedRaghavBagri(seepicture)isexpectingasignificantjumpinhisincomeafterhe
completesaprofessionalcourseheispursuing.Oncehisincomerises,heplanstoincreasehis
equityfundSIPsby1520%.

It'ssurprisingthatnotmanyinvestorsfollowthissimplestrategyeventhoughtheirincomerises
everyyear.Sure,theannualincrementinsalaryisnullifiedtosomeextentbytheincreasein
thecostofliving.Yet,evenwhenthereisamarkedincreaseintheinvestible
surplus,peopledon'tmatchtheirinvestmentswiththeincreaseinincome.Thesilverliningis
thatcontributionstotheProvidentFund,thebulwarkoftheretirementplanningofsalaried
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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

individuals,arelinkedtoincomeandautomaticallyincreaseaftereveryannualincrement.
Therightinvestmentmix
Welookedatthreedifferenttypesofinvestors:riskaverseindividualswhostayawayfrom
equities,moderateinvestorswhohavesomeexposuretostocksandaggressiveinvestorswho
arewillingtotakemorerisks.EachofthemstartswithamonthlyinvestmentofRs15,000
spreadacrossdifferentretirementsavingoptionsandincreasestheinvestmentamountby10%
everyyear.Unfortunatelyfortheriskaverseinvestor,hisnesteggisconsiderablysmallerthan
thoseofthemoderateandaggressiveinvestors.

ThisislargelybecauseapartfromhisProvidentFundandinvestmentsinsmallsavings
schemes,hehasinvestedinlowyieldlifeinsurancepoliciesandpensionplans.Lifeinsurance
policiesofferassuredreturnsandataxfreecorpus.Butthereturnsareverylowevenalong
termplanof2530yearswillnotbeabletogeneratemorethan67%.Planswithshorterterms
of1015yearswillyieldbarely56%.Pensionplansfromlifeinsurancecompaniesarealso
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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

highcostinstruments.
Whilethisshowsthatequityinvestmentsarecriticalforalongtermgoalsuchasretirement,the
othertwohaven'ttakentoomuchriskeither.Theequityexposureofthemoderateinvestor
doesnotexceed53%whiletheaggressiveinvestorhasamarginallyhigherallocationto
stocks.ThemoderateinvestorcomesveryclosetotheRs10croremark.Onlytheaggressive
investormanagestoreachtheninedigitmark.

Investingdisciplineneeded
Thebigproblem,however,isthelackofinvestingdisciplineandtheabilitytoremaininvested
overthelongterm.Thoughourcalculationsdonotallocatetoomuchtoequity,wehave
assumedregularinvestmentsforaperiodof30years.Inreality,datafromAMFIshowsthat
smallinvestorswithdraw47%oftheinvestmentsinequityfundsand54%ofinvestmentsin
nonequityfundswithintwoyears.Infact,27%ofequityfundinvestmentsarewithdrawnwithin
ayear."Smallinvestorsjustdon'thavethepatienceorthelongtermvisionrequiredtomake
moneyfromequityinvestments,"saysaseniorfundmanager.It'sfutiletoimagineanesteggof
Rs10crorein30yearsifyourinvestmenttermisonly12years.
Thetrajectoryofequityinvestmentsisneverastraightline.Itwillhaveupsanddown,whichis
aninherentfeatureofthisassetclass.However,inthelongtermtheseinvestmentswillprove
morerewardingthanfixedincomeoptionssuchasPPFandfixeddeposits.Thoughequity
fundshavechurnedoutmuchhigherreturnsinthepast15years,wehaveassumeda
conservative12%returnsfromequityinvestments.

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HowtosaveRs10croreforretirementwithouttakingtoomuchriskTheEconomicTimes

Lifestylechangesalsohelp
Ifapennysavedisapennyearned,youcanearnuptoRs1crorebymaking
certainLifestylechanges.Oneofthemistoquitsmoking.ETWealthdidsomenumber
crunchingandfoundthata30yearoldwhosmokesfivecigarettesadaywilllosemorethanRs
1crorebythetimeheretiresat60.Ourcalculationtakesintoaccountseveralthingsuchasthe
increaseinpricesofcigarettes,theexpensesonhealthcareduetosmokingasalsothehigher
lifeinsurancepremiumpaidbysmokers.Turntopage16foradetailedexplanationofhow
smokingcanleaveyournesteggpoorer.

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