Break the 10 per cent retirement planning rule

When it comes to personal finance and financial planning, we get dozens of thumb rules. However, what people forget is that thumb rules are quite generic in nature and not customised to suit their situation. Therefore, don’t consider thumb rules as the ultimate tool to manage your personal finances. Your personal situation might be way different and might require a different way to manage it. Having said that, retirement planning is one such aspect of financial planning, where we have a lot of thumb rules. However, in this article, we would be discussing the 10 per cent rule in retirement planning and why you should break it. 

Rule: Save 10 per cent of your income 

We have seen this rule floating around a lot of personal finance blogs. According to this rule, you should keep aside 10 per cent of your income for retirement. Though at first, it seems to ease the retirement planning complications but might lead to serious cashflow problems in retirement. Let us illustrate this to understand in a better manner. 

Illustration 

Say, for instance, your current age is 30 years and you would probably retire at the age of 60. Further, your salary grows at the rate of 7 per cent and you earn a 10 per cent compounded annual growth rate (CAGR) on your investments. Your monthly expense is say, Rs 20,000, which grows with inflation of seven per cent. During retirement (age- 60 to 100 i.e., 40 years) we assume you would need only 70 per cent of your pre-retirement expenses, which would again grow further with seven per cent inflation. 

Assuming your income to be Rs 50,000 per month and so, with the 10 per cent rule, you would be saving Rs 5,000 per month for your retirement. So, if you do a systematic investment plan (SIP) of Rs 5,000 every month in an investment fetching 10 per cent CAGR, at your age of 60, you will have Rs 1.04 crore. 

With this, you’ll become a crorepati at your retirement. This may sound like music to your ears. However, what if we say that in the middle of your retirement, you would be in a state of shock? Let's see how. 

In the previous paragraphs, we have assumed your expense to be Rs 20,000 per month that would grow at an inflation rate. Now with this, let us calculate the monthly expense that you would need during the first year of your retirement. You would require Rs 1.52 lakh per month adjusted for inflation. 

It is clearly evident from the above graph that at the most, you will be able to survive up to the age of 66. This means that at the age of 66, your entire retirement corpus as created by the thumb rule exhausts. Therefore, we urge you to keep no faith in any such thumb rule and have a proper financial plan in place as they are customised as per your financial situation.