How much should you save for retirement? It’s very hard to know. If you’re youmg today, how would you know what groceries and medicines would cost when you are 60? But we know that the key is to start saving and investing early in life. In an article about investing in your 30s, the US-based Fidelity Investments suggested two things. One — by the age of 30, you should have saved as much as your annual income at 30. Two — by 35, you should have saved twice your annual income at 35. So, for example, if your annual income at 35 is Rs 10 lakh, your savings at this point should be Rs 20 lakh. Getting to this level of savings in your 30s allows you to create a financial base that would grow rapidly with the effect of compounding, giving you the ideal sized corpus in your retirement years. How is this possible, you ask?
THE IDEA
The idea that you should have saved 2x your income at 35, by 35, was recently posted on Twitter. It set the cat among the pigeons. Most millennials laughed at the idea. They said this just isn’t possible, especially with the extreme costs of college education in the United States which keeps people in debt well into their 50s.
“By 35 you should have debt twice your salary,” one Twitter user joked. However, this isn’t the case in India. Not only is higher education affordable in comparison, Indians also have the culture of paying for their children’s college as well as financially aiding them into their 20s and 30s.
A SIMPLE CALCULATION
Let’s say you are 21, and at the start of your career. We assume you are earning Rs 15,000 a month. Start with just 15 per cent savings every month, i.e., Rs 2,250, or Rs 27,000 a year. Invest this amount in an equity mutual fund through an SIP. The amount would be automatically deducted from your bank account to buy your chosen mutual fund. We assume that over the long-term your income will grow at 10 per cent a year. By the age of 35, which is 14 years later, your income would have grown to Rs 5.2 lakh. Your annual savings at 15% would therefore grow to Rs 77,600. With this SIP, your savings before you turn 36 would have reached Rs 10.87 lakh — just a little more than double your income at that point.
IS IT POSSIBLE?
Short answer is yes. It is possible to save two times your income at 35, by the age of 35. If you are really smart about your savings, you could do better than 2x. The key, like I said above, is to start investing early in life and to be disciplined. You need to save and invest at least 15 per cent of your annual income to achieve this. You also need to be smart about your investment instrument. You won’t achieve the 2x goal with a low-yield instrument such as a fixed deposit or even PPF. Your best bet is a top-rated equity mutual fund which can provide a long-term CAGR of 10 per cent or more. Since retirement is a long-term goal, you should definitely invest for it at least in part with equity.
WHICH MUTUAL FUNDS TO PICK
If we look at the long-term returns from equity mutual funds, the marketplace as a whole has delivered a 10-year CAGR of more than 11 per cent, which exceeds returns from small savings schemes such as PPF. However, there are star-rated funds that have comfortably exceeded 11 per cent, delivering a CAGR of even 15 per cent. If you wish to combine wealth creation with tax savings under Section 80C, buy an ELSS mutual fund.
