How to do Investment planning for Retirement?
Investing your hard-earned money in assets, which can generate enough returns to sustain through your retired life is very important. Investing is a long process and you need to have good planning to save and invest throughout your working life.
Before learning why we need to invest, let me tell you what would happen if you will not invest or not have investment plan in our life.
Assume you earn Rs. 50,000 per month and you spend Rs. 30,000 for living a regular life, so you have Rs. 20,000 left every month. Assume that you will not invest that Rs. 20,000 and keep it as hard cash money.
Now, the question is, with this practice how much money will you have by the time you retire? We ignore tax as of now for easy understanding.
- Your company gives you a 10% salary hike every year.
- The cost of living increases by 8% year on year
- We assume that you are 30 years old and plan to retire at age of 50, so you will work 20 more years in your life
- you will not work after the age of 50.
- Your expenses are fixed and you will not spend on unnecessary things.
- The balance cash of Rs. 20,000 per month is in your saving account.
At this rate, can you survive financial freedom by putting Rs. 20,000 in your savings account for your retirement?
Thank You.
Here is the Math
- 1st year you earn Rs. 6,00,000 /- which is Rs. 50,000 per month * 12 Months.
- Your monthly expense is Rs. 30,000 per month that means 30,000*12 = Rs. 3,60,000 /-.
- You put Rs. 20,000 in your saving account on every month that means 20,000*12 = Rs. 2,40,000 /-.
- in 2nd year you get a hike of 10% so your month income is Rs. 55,000 so on this year you earn Rs. 6,60,000.
- The expenses have increased by 8% now, so do the retained cash.
- Now we calculate that for 20 years of saving
- After 20 years of your hard work you save 1.7 Crore.
- Your expenses are fixed, We assume that you will compromise with your dream like better home, international Vacation Tour, Luxurious Car etc.
- After Retirement we assume the expenses will continue to grow at 8%, So 1.7Cr is good enough to live at least 10 years after retirement. After 10 years you have literally no savings left in your bank account.
What would you do after you have no single penny in your saving account after 10 years? How will you survive your life? Is there any way to save or make larger savings before retirement?
Now We are entering to The investment zone.
Now Consider this, instead of keeping the cash in a savings account, you choose to invest that cash in an investment option which grows at 12% per annum.
For Example, at the end of your first year you save Rs. 2,40,000 which you decide to invest at 12% for next 19 years. The second year you save Rs. 2,71,000 which again is invested at 12% for 18 years. The Table below helps you understand how the numbers grow.
At the end of 19 years, The 1st year investment of Rs. 2,40,000 grows to Rs, 2,067,063 /-, This is at 12% growth. Same for our second year investment which was Rs 2,71,000 grows to Rs. 2,085,519/-.
If this continue for 20 years then you get Rs 4.2Cr, which is 2.4 times higher than what you would have otherwise saved.
Finally, You know why you should invest!
To summarise, you have 3 reasons to start investing today -
- Fight Against Inflation- By investing one can deal better with growing cost of living - generally referred to as Inflation. For example In 2015 petrol price was Rs 60, In 2021 petrol price is 85.
- Create Wealth - By investing one can aim to have a better amount of money by the end of some time period. In above example, the time period was up to retirement but it can be anything - children's education, marriage, Own Big House, Retirement Holiday etc.
- To meet Life's Dream - Better Home, A Luxurious Car, Quality Vacations.
Now that you are hopefully convinced, here is a bigger question :
Where to invest?
We will cover this part in our Next Blog
Thank You.
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