We received several questions from readers based on our discussion last week on how you can use simple rules to design your asset-allocation strategy. Most of these questions alluded to a very important issue: how much to save for retirement? This question is, indeed, critical to building your retirement fund. In this article, we discuss a simple process you can adopt to save for your retirement fund. It is important to note that our suggestion is not a substitute for the sophisticated models used by investment advisers, should you choose to hire one.

Simple does it.

Your first step in achieving a financial goal would be to set aside some money from your current income. For without savings, you cannot invest! So, how much should you save for retirement? Your objective should be to balance your current lifestyle with your post-retirement consumption. Save too much today and you will be sacrificing your present lifestyle. Save too little and you will fail to achieve your desired post-retirement lifestyle.

It is true that your savings should be based on what you desire to achieve. Suppose you need Rs 7.5 lakh three years hence. Assuming you can earn 8 per cent return annually, you should save Rs 18,400 a month.

But what if you are unable to save the required amount? There is a high possibility that you will be disillusioned because you cannot save enough to achieve your goal. And this may prevent you from even saving whatever you can.

To overcome this emotional barrier, first total your monthly non-discretionary expenses — expenses necessary to sustain your normal lifestyle. Your savings every month towards retirement should be your monthly income less non-discretionary expenses including savings required to meet intermediate goals such as your child’s education. Be sure to give an auto-debit instruction to your bank to transfer the monthly savings to already-identified investment products. But why not use sophisticated models to estimate your retirement needs?

Complex models?

The amount you need to save till your retirement is based on several factors. First, you need to know how long you will live. This is important because your retirement fund should have enough money to support your post-retirement lifestyle till you live. If you live longer than you estimate, there is a chance that you may run out of money.

Second, you need to estimate inflation during your post-retirement period. You realise, of course, that forecasting next year’s inflation is difficult, leave alone 15 or 25 years ahead. And third, your lifestyle may change, which may require adjustment to your retirement fund.

We are not saying that you should not use sophisticated models. Rather, we are suggesting that you need not spend considerable time doing so. You may just as well get started by saving as much as your current lifestyle can support. And to ensure that you keep pace with inflation, step up your savings each year. That is, you should religiously save a proportion of your incremental income as well, assuming your income goes up every year.

That said, here is a thumb rule that you can consider. Take the approximate annual expense estimated in your first year of retirement. You can start with your current monthly expenses and adjust for any anticipated post-retirement lifestyle changes. Multiply this estimated annual expense by 25 to arrive at an approximate amount you need at retirement.


You should set up a mechanical savings process if you propose to self-manage your investments. We believe that your savings habit is more important to you than taking efforts to estimate the correct amount.

(This article was published in the Business Line print edition dated July 22, 2012)
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