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Originally Posted by Saanil Got it - I completely ignored inflation! Can you help me with one calculation. I am 30 years old now. Let us say my aim is to have 1cr in my bank account by the time I am 40 years old i.e. in 10 years. How much should I save monthly in order to reach my target i.e. 1cr in bank account in 10 years. My salary is the only source of income and it will grow at 5% per annum. |
Assuming you use a high-return investment vehicle (say 10%), around Rs.43,500. Here's the calculation:
But keep in mind that after 10 years, 1 crore will have only the value that 50 lakhs has now. So plan for it in your mind as 50 lakhs (from buying power perspective), not as 1 crore.
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Originally Posted by sdp1975 My calculations are based on zero inflation...
My assumptions are that inflation and wealth grow roughly at the same rate , especially so over a long period of time , and the growth of wealth is the same whichever investment class you put it in - such as FDs , equities , property , gold etc . They're all going to average out in the end with their upturns and downturns. It does make the calculations a lot simpler for me. |
But if inflation and growth even out, then where will withdrawal / usage come from? If withdrawal continuously happen when growth and inflation stay roughly the same, and eventually bring the corpus down to zero?
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Originally Posted by the_skyliner Before anyone decides to hang their shoes they should definitely ask themselves this: what is that they will be able to do by retiring early that they can not do now?
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Important is thinking over this along with planning finances for retirement. If planned well, it can be liberating for sure. |
Insihgtful, thanks! I think you hit the nail on the head.
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Originally Posted by alpha1 The only issue that I see is 5 crore corpus and Middle class in the same paragraph. I think the nouveau rich love calling themselves middle class.
Or perhaps you meant a rich guy fixes this as a corpus and then downgrades to a middle class lifestyle?
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However, there is one thing that one point that I want to make: please don't assume that your "basic needs" 10 years or 20 years down the line will be same as today with only y-o-y cost inflation.
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Agreed! I did mean the "rich" man choosing to live the middle-class-ish lifestyle. It is not a middle class lifestyle, because the middle class man has to work full-time and not unusually overtime. Not having to work is essentially the opposite of this. Only the external and superfluous aspects of their lifestyles are the same. Same kind of house, same kind of vehicle, same patterns of spending. With one "minor" difference- one has to work, one doesn't.
Interesting! I did not think that we would need more money than we do now, after accounting for inflation.
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Originally Posted by SilentEngine This is true for what age? Or are you saying that with kind of corpus, one can live for as long as one lives, irrespective of current age?
A lot of "middle-class" folks retire without ever seeing even a fraction of that amount and somehow seem to be able manage just fine. |
For any age, but by current prices. Broadly speaking, here is the calculation (as you can see, there is a lot of buffer / room for comfort in this calculation):
Monthly expenses for a small middle-class family (approximtaley):
- Food 10000
- Clothing 7000
- Home & appliance maintenance 5000
- Property tax 5000
- Healthcare 8000
Education 8000 - Utilities 5000
- Transport 10000
- Recreation 5000
- Luxury shopping 5000
= Rs.68,000 per month
Let's say you have 5 crores:
- Set aside 20% (1 crore) for future big ticket items like children's education, wedding, our own old-age health
- Remaining 4 crores, invest in mutual funds
- Let's say on average they generate 10% YoY, and inflation is around 7%. The remaining 3% can be used.
- I like to give myself another buffer over inflation spikes, and use just 2.5% instead of 3%.
- That would be - (40000000 * .025 * .9 / 12) = Rs.75,000 per month
- That slightly exceeds our "monthly needs" by 10% and leaves us in a comfortable spot.
Theoretically, this should continue to grow indefinitely, regardless of age and lifespan. Since we are withdrawing only 2.5% (or even 3%), the remainder of the returns should balance out inflation in the long run, and value-wise remain on parity with it.
But I guess you could cut down on this a lot - this calculation includes some comfort buffers. If you need to go minimalist:
- Reduce or remove the 20% buffer, and cover these expenses with inherited money (especially if you have another one to live in)
- Reduce the percentage buffer and use (withdraw) 3% instead of 2.5%
- If you do these, you could hit the desired Rs.68K at 3 crore itself instead of 5.
- You could do a lot to reduce the monthly too, depending on where you live. Some families would scoff at the 68K figure, and comfortably live on half of that. So you could even reduce that 3 crore to 1.5, for those families. It is all about 1) lifestyle, 2) building a corpus, and 3) investment vehicle for max return rate