My column from last week, where I mapped how much we need to save to meet our retirement goals, got a whole lot of responses, questions and push backs. You can read the column. Over the next few weeks I hope to keep the conversation going and take up some of the questions and push backs in this space.
Many readers wrote in to ask if savings of 30 to 40% were even possible. Let’s open up these numbers. First, you need to save this much only if you don’t have a single rupee in savings anywhere. If you have savings or other assets, this number will come down. Most people have more than they think. Consolidate your money. Create an emergency fund, buy a medical cover for your family and a pure term cover for yourself to build a safety net. You need less liquid cash if you do these three things. Next, count all the balances in your provident fund, your PPF, your FDs, gold, any real estate other than the home you live in. Include the value of your mutual funds if any, find out what the value of the endowment or money back policies are and count those in as well. Do not underestimate the power of order in your money box. We don’t take simple solutions seriously when it comes to money thinking that we need rocket science to get this right. We don’t. Common sense works.
Two, remember that you are already doing 24% of your basic income as savings through your EPF deductions. You contribute 12% and your employer matches that. By age 30 most people have begun to do at least their tax saving investments, if not a bit more. Count that in when you think about the 30% or 40% number. If you are self employed or not part of an EPF, then you are more vulnerable than those with a retirement plan in place. Make it mandatory in your head to save at least as much as others are doing with their EPF as the first step.
Three, savings becomes a habit when you remove what you want to save from your spending money. Cash in the bank gets spent. And spending adjusts to what is available. Separate out what you intend to save from your salary or money inflow account. You can use another bank account to do that. In your head label that bank account ‘my investment account’. Every month simply move money out of your salary account into your investment account. Once you know you can save regularly, you will be able to move the savings into investments.
Four, the rule of thumb can be tweaked into an easier saving schedule once you get used to saving and investing. The 30s and 40s in a householder’s life are the decades of high expenses – the home and car EMIs are high, kids are growing and you are saving for their education and marriage. But the decade of the 50s is one of high income and much lower spends. You are at the peak of your earnings cycle. Your home EMIs are (if they are not, know that they should be) are paid off. Your kids are financially independent. This is the decade when you can save at least half your income, I know people who save almost 70% of their income at this age. If you are disciplined enough to target a much higher saving rate in your 50s, you can reduce the burden on your younger self.