How to invest 40 lakhs for retirement corpus in 20 years

Personal finance
12

Based on the then prevailing PPF rates,
and the overall distribution of the rest of one’s assets (rate of return? liquidity? guarantee?) ,
it might like a decent option to continue the PPF in 5 year blocks till one needs the amount for a planned life-event :+1:t4:

Looking at this NISM Retirement Calculator, it is built around calculating -

Corpus Required at Retirement day
to maintain present standard of living
during Retired Life

In a developing nation like ours, the standard of living (according to modern sensibilities) is constantly improving around us. improving infrastructure, improving quality of consumables, improving number and variety of services available, … etc. All of them add to the minimum baseline expense.

As the country develops, goods and services that are luxuries today (e.g., high-speed internet everywhere, advanced healthcare options, new forms of entertainment) become baseline expectations. To feel like one is “maintaining” the standard, one needs to keep up with the new normal. This is the essence of “silent lifestyle inflation”. For example, most folks in 2005 planning their retirement in 2025, would not have accounted for the recurring monthly cost of multiple streaming services, cloud storage, or advanced smartphone plans, which are now common expenses in most households.

Over time, to truly “maintain present standard of living”, one has to put in active effort to stick to one’s standard of living and not be silently subject to lifestyle-inflation and increasing expenses. If the overall standard of living keeps improving around in any given place, “maintaining present lifestyle” can require even moving to different place (eg. from a tier-1 city to tier-2 town).

If one cannot maintain one’s present standard of living, and subjects oneself to silent lifestyle inflation, then the amounts obtained using the retirement calculator can be insufficient! :hot_face:

So, what to do about it, now?
One approach is to start by calculating one’s own personal rate-of-inflation.

Assuming one has managed one’s own finances for more than a decade now, one can calculate a “personal rate of inflation” based on the change in one’s monthly expenses over the years. Next, plugging this rate into the above retirement calculator as the “Long Term Inflation” rate, should provide a more accurate estimate of one’s expected expenses over the coming years.

Alternately, one can choose to be more conscious about avoiding silent lifestyle inflation where possible, starting today (and continuing into the future),…

  • thus, enabling more of one’s income to be left over to invest into assets today.
  • and reducing future needs i.e. the target corpus needed to be financially independent.

…and opt to,
invest more in assets with lower risks, i.e. better guarantees of achieving one’s planned goals and financial independence over the long-run.

Mostly depends on the individual’s lifestyle choices.

Just as an example,
in a tier-1 metropolitan city,
consider these 2 families of 4 (1 child, 2 parents, 1 grandparent).

  • Family1 - Spends around 1L per month.
  • Family2 - Spends around 40K per month.

Folks from both the families are
healthy, fulfilled, and enjoying their respective stages of life that they are in.

The difference in expenses involves a lot of expenditure around eating-out, daily-entertainment, weekend-entertainment, and incidental expenses due to not planning ahead.

  • While family1 has a gym membership and a part-time nanny, family2 has neither and parents spend time playing with the kid at home and in their local park, and sharing household chores.

  • While family1 has a TV and multiple OTT subscriptions, family2 relies on broadband internet and freely available entertainment options (global archives of excellent variety of programming over the past 5 decades), and digital content from a nearby library.

  • While family1 lives closer to the centre of the city, easier access to restaurants, pubs, and malls; family2 lives further away in the outskirts/suburbs at a walking distance from regular/frequent public transport, public park(s), public library all of which they use extensively.

  • While family1 tends to schedule impromptu activities, family2 tends to plan ahead days/weeks (sometimes even months), be it meal-planning (avoid wastage), or travel (take advantage of off-peak/de-congested times).

A common pattern in family2 is
to ensure each item of expenditure fulfills multiple needs.

A lot of this involves a team effort by the entire family.

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