Contravene the 10% rule for retirement planning

Contravene the 10% rule for retirement planning

by 5paisa Research Team Last Updated: 2022-07-07T14:19:57+05:30

Not all rules are meant to be broken because they can cost you a lot of money. However, in this post, we will explain why you should veer away from the 10 per cent retirement planning rule.  

We get dozens of thumb rules when it comes to personal finance and financial planning. What people forget is that thumb rules are quite generic in nature and cannot be tailored to their specific situation.

As a result, don't think of thumb rules as the ultimate tool for managing your personal finances. Your situation may be very different and necessitate a different approach.

As previously stated, retirement planning is one aspect of financial planning where we have a lot of general guidelines. But in this article, we'll talk about why you should deviate from the 10% rule of retirement planning.

Rule: Saving 10% of your income

This rule has been mentioned on numerous personal finance blogs. This rule states that you should set aside 10% of your income for retirement.

Though it appears to ease retirement planning complications at first, it may lead to serious cashflow problems in retirement. Let us demonstrate this for a better understanding.

Illustration

Assume your current age is 30 years and you plan to retire at the age of 60. Furthermore, your salary grows at a 7% annual rate, and your investments grow at a 10% compound annual growth rate (CAGR).  

Your monthly expenditure is Rs 20,000, which rises with 7% inflation. We assume that during retirement (age 60 to 100, i.e., 40 years), you will only require 70% of your pre-retirement expenses, which will increase further with 7% inflation. 

Assuming your monthly income is Rs 50,000, you would be saving Rs 5,000 per month for retirement under the 10% rule. So, if you invest Rs 5,000 per month in an investment yielding a 10% CAGR, you will have Rs 1.04 crore at the age of 60. 

Wow! At retirement, you attained the status of crorepati. You might find this to be delightful. But what if we told you that you'd be surprised in the middle of your retirement? Let's take a look at how. 

As mentioned above, we have assumed your expense to be Rs 20,000 per month which would grow at the inflation rate. Now with this, let us calculate the monthly expense that you would need during the first year of your retirement. 

You would need Rs 1.52 lakh per month after inflation. So, assuming the aforementioned monthly withdrawal with 7% inflation until your life expectancy, your corpus would dry up when you reach the age of 66. 

This means that at the age of 66, your entire retirement corpus, as determined by the thumb rule, will be exhausted. As a result, we urge you to disregard any such rule and to develop a proper financial plan. Because they are tailored to your specific financial situation. 


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