I’m 40, earn Rs 1.5 lakh and spend Rs 55,000 a month. How much do I need to save for retirement?

I’m a 40-year-old working with a private company with a monthly income of Rs 1.5 lakh. I have a couple of queries regarding my financial goals and I seek your kind suggestion. 

1) I have monthly investments in PPF of Rs 10,000 and in SIP of Rs 25,000

2) I have a home loan for which I’m paying a monthly EMI of Rs 10,000 and currently I’m staying in a rented accommodation. 

3) I need to save money for my retirement and also I want to know how I can increase savings and grow my money with my existing income. 

4) My total monthly expenses come to Rs 1 lakh per month inclusive of my investments.

 

By: S. Banerjee

 

Reply by Rahul Jain, President & Head, Nuvama Wealth 

Your question is about retirement planning. The first step is to determine how much retirement funds you will require. With current household expenses of Rs 55,000, and assumed retirement at 58, a life expectancy of 90 years, an average inflation rate of 6 per cent, and a post-tax return on investments at retirement of 5 per cent per annum, you will require a corpus of Rs 7 crore. 

The next step is determining the investment amount that will accumulate this corpus over 18 years. Assuming a 10 per cent annual return on your retirement portfolio, you must invest Rs 1.20 lakh per month in a mix of equity and debt over the next 18 years. 

After deducting EMI and household expenses, your present net savings are Rs 85,000, which is less than the required investment rate of Rs 1.20 lakh. You must strive to achieve the target investment rate within the next 2-3 years, or else it may become difficult to build the desired corpus. 

You have already invested Rs 35,000 of your existing savings of Rs 85,000 in PPF and SIP. The remaining Rs 50,000 can be divided in a 60:40 equity-debt ratio and invested in combination equity funds, PPF (up to a maximum limit of Rs 1.50 lakh), and fixed-income instruments such as bonds and NCDs. 

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Because the corpus is based on your current lifestyle, it is subject to change over time. The goal must be reviewed annually to account for changes in the underlying assumptions.

The most effective way to increase savings is to reduce your expenses, particularly discretionary expenses, including lifestyle expenses.  If possible, shift to owned accommodation rather than staying in rented accommodation.

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)