Recently i read an article in a so called business magazine which pretend to analyse your case and suggest how much you need for retirement.So the person under the scanner was 35 years and wanted to retire after 20 years and needed around 1 cr to retire at todays costs. The analyst did some idiotic calculation and came to the conclusion that he would require some 5 crores to retire. He took the assumption of inflation at 6-7 percent and returns at 7-8 percent and advised that he should atleast work for four more years (ie 24 years) before he should retire. Then he would have the requisite amount. It is amazing where you do not know whether you will have a job the next year to be able to predict that one should work for 24 years. The analyst has in a casual way doled out a life imprisonment to the poor chap and doomed the guy to work for eternity before he can sit back and enjoy a warm cup of coffee without thinking of his future. The sad part is the guy will take it seriously and slog his butt of for 24 years before he sits back and realises that he most probably did not need so much anyways. And then will give that money to his kids to start this journey all over again.
The analysts of today are in an inane way because of these stupid predicitions creating a generation of people who want to blow up all their money today. Yes you heard me right - the analysts by telling people to invest and save their money are actually encouraging people to blow up their money. Think about it, if somebody told you that it would take 30 years to fulfil your dreams what would you do. Save your money for 30 years , or feel that since you have to work anyways for the rest of your life you might as well get your small pleasures today itself and go ahead and start blowing up your money. So with no tangible goal in sight all the people in their 20's and their 30's are spending their money like they have never heard of Fixed deposits and Pensions. Also because the only way it seems to get to the elusive figure of 5 crores to have higher returns people are investing whatever little is left in the equity market. Buoyed up by the analysts who claim 50-100% return in the share market, people are dumping all of their hard earned money in the equity market only to loose all of it when the market tanks. Equity markets can give good returns but it has to be treaded carefully. And it is definitely not the place for people who have only 5-10 lacs in saving and two kids to feed.
So anyways back to the main focus of this blog - why we need much lesser than what the analysts are saying to be able to retire.
Lets look at some of the components of our annual expenditure and try to guess at what it will be after 15-20 years.
I am just for the examples assuming that you are spending around a lakh every month
Mortgage
One of the major components which could be as high as 30% of your expenditure is the mortgage on your house. So Rs 30000 goes out this way. 15 to 20 years later you would have paid of this and it will go down to 0. If you are smart you have taken a fixed interest in which case inflation wont matter. Incase you havent do it the next time the interest rate softens.
Reverse Mortgage
While reverse mortgage has failed this time around rest assured it will be back with a bang again. So you will not only not be paying mortgages but actually gaining out of your house maybe 20000-30000 pm. Here inflation will work to your favor and if the analysts are right you might be getting as much as 50000-1 lakh as reverse mortgage.
Food
This is one thing which will most probably be hit by inflation the most. So food will definitely become costlier. In this I guess what would increase more is the cost of eating out. Also remember while cost of growing rice might increase, the cost of buying rice from the shops might not increase so significantly. As retail chains make their supply chains more efficient and as a lot of the intermediary cost might go down because of internet a lot of the cost of growing rice will be offset by reducing the cost of the chain. Also because of competition there will always be a pressure on reducing the cost. Because of this my guess is food will maybe double in cost in the next 10-15 years. But remember food forms a small part fo the expenditure amybe 10%. And remeber as your kids shift out you will have less mouths to feed. So in the end the impact will be marginal.
Telephone and communication Bills
When mobiles were launched it used to cost 16 bucks for a minute. Now it costs less than a rupee. And with web based alternatives for free calls and sms there is no reason to believe that the costs of telephone bills will ever go up. Infact they should move more and more closer to free. With everybody having a mobile you do not need to even have a landline. Also cost of sending snail mails and postage stamps has all become zero.
Books,Magazines and music
Internet has created an alternative which has dragged the cost of books and music to virtually free. When you retire you don't need to buy and newspapers, books, magazines or music. You will be able to easily get them free of cost on the net. So that cost will also be virtually zero.
Clothes
In 2000 an Allen Solly shirt used to cost around Rs 1000. Today it may be costing around Rs 1200. Not very significant. What is more interesting is that they have a sale every six months where they sell the same shirt for 700 bucks. You can buy the 'honest' Peter England shirt for 600 bucks even without discount. With consumerism the market has got flooded with so many brands that nobody can really raise their prices. So while cotton might have got costlier, cotton shirts have not. I don't see any reason why shirts would be costlier 15 years down the line. And if the sales remain as today you might end up paying less. Also remember you are not getting taller and hopefully not fatter. So all the shirts you would have collected over the years would be still there after you retire. Even now my cupboard is so full of clothes that I dont know why I need more clothes. I think i just buy more clothes for the heck of it. There is no real need. And nowdays the shirts are being made of much better material. so they last for much longer. So in totality the cost of clothes after you retire would remain most probably the same.
Holidays
Six, seven years ago a flight ticket used to cost much more than today. With budget airlines, a well planned off season travel could cost you peanuts.
Even international flights are much cheaper than they were in 2000. While hotels have increased their rates marginally, because of the net you can find much better deals which actually mean you might be paying much lesser. Also you can buy a RCI or a Mahindra resorts membership which will take care of the inflation. Add to this the fact that rupee should become stronger, and the fact that countries like USA and Australia have virtually no inflation the next 15-20 years might see internation travel being cheaper. Even within India with so many hotel chains opening up, a hotel room has actually become cheaper than 4-5 years ago.
So my guess is the cost of well planned holidays to countries whose currency has depreciated vis-a-vis India , fifteen years down the line will be similar to today.
Servant and driver
Almost every indian house has a servant. And the cost of a servant has been steadily rising and will become astronomical in fifteen years. It will become so costly that you won't be able to afford one and the cost will come down to zero. After retirement you will have ample time for household work. Aided by your sophisticated washing+ drying machine, your dishwasher, vacuum cleaner and the advanced microwave you wont need a servant anyways. Look at the saving on the broken glasses. With advancements in technology houses will remain much more cleaner and we will move more towards the american culture.
Ditto for the driver. It will be nice to drive on your own and will give you an opportunity to exercise your hands.
Electricity
The cost of each unit of electricity will go up. But the number of units we consume will definitely come down. With CFL's and much more energy efficient devices the cost of electricity might actually stay there only or increase marginally.
Taxes
How did I forget this one. In the 70's you had to pay tax of around 98%. If you dont believe me google on the tax slabs of the 70's. Now taxes are between 20 to 30 percent and are slated to again go down. So chances are high that you will be paying much lesser tax fifteen years down the line than you are paying today. Other forms of taxes like excise and customs steadily coming down will also have a positive impact.
Capital and Savings
This one is subtle. Remember today your income is divided into three parts. Taxes, Saving and Expenditure. Once you retire your income will only be divided into two parts, Taxes and Expenditure. So you will need much lesser than today for having the same money in hand. Also remember not only are you not having to save you are also going to consume your saved capital which would be totally tax free. All the analysts make a mistake here. They try to create so much capital that the interest can sustain you. But why would you want to keep your capital. You should be able to consume small portions of it as you go along. And remember this is tax free
White Goods
A computer 20 years ago costed 80000 bucks. Today you can get a ten times more powerful machine in Rs 20000. When we bought a 21 inch color television way back in 85, it costed around 12 thousand. Today you can get a 29" flat television for ten thousand. In a couple of years you might even get LCd's for the same price. A refregirator has always costed around RS 15000 since I can remember. A washing machine is again in the same range since eternity. White goods have become cheaper or remained the same. At the same time they have become more efficient and require less repairs and last for decades without any major problems. So don't expect to spend much on white goods after you retire. Also you will have bought most of them before you retire so you can just continue using them. Again all the newer goods are now only marginally better than their older counterparts. So while a 4 mega pixel camera is twice as powerful as a 2 megapixel one, a 12 megapixel one is only marginally better than a 10 megapixel one. what I am trying to get to is that the newer white goods are just marginally better so unless you get bowled over by the glitzy ads you don't really need to keep replacing your machines every three years.
So when a 80 Gb Hard disk came out, there was a need to replace your 40 Gb one, the same is not true with your current 500 Gb one. I have a laptop with 140 Gb Hard drive and i have never used more than 80 gb.
Also many of the white goods are getting combined and making other white goods redundant. So an IPod and a pair of speakers can replace your complete music system, and an IPod plus a laptop can replace your music system, DVD Player and your television.
So until you want the latest 40 inch LED, you can safely assume that your expense on White goods is going to come down
Petrol
This one is tricky and could go in any direction. With rupee appreciating, petrol should become cheaper though inflation may take all that benefit away. But with cars becoming more efficient the cost of driving should stay similar or may come down. In ten years you might be using very cheap bio fuel or even using water and air to drive. Also car costs have stayed put or come down with more cars available in the cheaper segments. A sx4 at 7 lakhs now gives relatively similar features as a Corolla. If you remove your ego you can get a car with bells and whistles at 5-6 lakhs something one could never dream of about 5 years ago. Also once you retire you will need to drive less anyways.
So my guess is the cost of car + petrol will not be vastly different after you retire
Kid's Marriage
One of the biggest concerns of all the parents is the cost of marrying their kids after 15-20 years And they are budgeting anything around 50 lacs to 1 cr after inflation for this. Well i think this particular one is very hypothetical. I am not even sure people will be marrying after 15 years. And i am sure that if you dont have enough money for a lavish marriage at that time he or she will understand and be open to a marriage in a court or temple. Saving for marriage seems very futile and unnecessary. So i would not factor this one at all into my retirement.
Kid's Education
This one is going to be costly. No doubt about it. But most of the kids education having been completed before you retire and easy loans for post graduation you should be able to see through this without too much of a scare.
There are many other areas of discussion, but I think you are getting the picture. The future might not be so costly as we are making it out to be.
Below I have made charts for a family of today and how they may look like after 15 years. From my understanding if you have around 2 crores you should be able to easily manage an expenditure of around 16 lacs without any worries. Even conservatively I still get around 5 lacs still available for expenditures which are difficult imagine today.
So what I am trying to conclude is that the retirement is not as far fetched as it seems and with a little bit of pragmatism and restraint you should be able to live a happy retired life in anything between 1 to 2 crores even after fifteen years. So dont get swayed by the analysts. They have their own axe to grind. Think about what you want and make your decisions. And yes start saving today because you can retire much faster than you realise.
