An independent US institute has recommended saving 10 per cent of our salaries from our early 20s to live comfortably

People are living longer in these times and this can be considered both good and bad news. According to the latest WHO report in 2018, the life expectancy of men has increased from 64.2 years in 2015 to 67.4 years in 2018, and an average woman in India lives to the age of 70.3 years. However, the catch is that people are living longer with disability and illness.  All of us, whether we are in our early 20s, 30s, or 40s, will age and reach a stage of life where we would retire and stop working for a living and may continue to a have a long life albeit with some diseases. And here comes the worrisome thought, “Am I saving enough for my retirement?” and “How much of my salary should I set aside for a comfortable life after retirement?”  So, what is the magic number representing the percentage savings from our salary that would make our retirement easier and happier for us?

While we try to save as much as possible for our retirement, during our working years, we feel pinched from all directions. Life can be expensive even in our earning years, with kids’ education, housing and medical costs going through the roof. Any kind of loans, like student loans and credit-card debt, also intrude. Often it is not easy for us to look way ahead in future and imagine what would our future income be and how long would we continue to work; what would be our preferred lifestyle after retirement; how much would healthcare cost after many decades; our longevity; and how will our investments fare many years down the line? The result is obvious confusion and sometimes, this forces us to relegate it for consideration later. Although there is no magic number that can be same for all due to several reasons like low salary for some people, longevity or higher requirement of medical care in some others, independent research by some institutions, which do not have conflict of interest, like Employee Benefits Research Institute in Washington D.C, have given a useful thumb rule of saving 10 per cent. This organisation came to the conclusion after gathering anonymous information of millions of people and their saving habits.

So, based on the thumb rule, between you and your employer, set aside at least 10 per cent of your salary for retirement. Research shows that saving 10 per cent of salary, starting in your mid-20s, cuts the risk of running out of money in retirement to about 30 per cent.  If your employer contributes three per cent, then your share is at least seven per cent. If the company kicks in five per cent, then you save at least five per cent. If your employer does nothing, set aside at least 10 per cent of each salary on your own.  But is the 10 per cent rule same for all?  Generally, if a person decides to save for retirement early, it is safe to say that 10 per cent savings would suffice. The moment the age of starting retirement savings increases, the rate of savings should also go up. Therefore, the 10 per cent is probably not enough for all. For the late savers, the rule of 20 per cent can come handy. This rule requires that for every rupee in income needed in retirement, a retiree should save `20. Let’s say you earn about `5,00,000 in a year. You would need `1 crore by the time you stop working to maintain the same income level afterward. If you had somehow managed to save `4,000 per month (10 per cent of that wage) for 40 years at 6.5 per cent interest, that would get you to slightly more than `91,34,250, which is close. However, young people generally earn less than older ones. And how many people save `48,000 a year for 40 years?

Realistically, most people need to save well over 10 per cent of their income to come close to what they need.  Once you have saved enough for your retirement, the four per cent rule suggests how much you should withdraw once you get to retirement. To sustain savings in the long term, it recommends that retirees withdraw about four per cent of their money from their retirement account in the first year, then use that as a baseline to withdraw an inflation-adjusted amount in each subsequent year. More conservative people should think of three per cent withdrawal rate. Although several rules are given by different financial planners and independent research agencies, retirement fund planning is very individualistic in nature.

We need to keep in mind the following steps while planning our retirement. First, develop a retirement budget and age. You have to know how much you need per month to live on. The categories of expenses, like groceries, car expenses and eating out may change significantly in retirement, but having an idea of what normal feels like before retirement is a good place to start. In addition, decide what age you plan to retire at and determine how much you will need to save in order to live a comfortable lifestyle.  Achieving financial security is not possible without proper planning and commitment to save on a regular basis.

(The writer is Assistant Professor at Amity University)