# The Fallacy of Traditional Retirement Calculations

by on October 6, 2011

in Finance

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The more I read about retirement calculations in leading personal finance publications, the greater is my conviction that there is something fundamentally wrong with their methodology. Depending upon the particular case in hand (i.e. family being studied), I’ve seen figures of 4.5 crore, 6 crore, 7.2 crore, … , and recently even 14 crore thrown around. Big fancy numbers thrown up in the air but all backed by solid assumptions and mathematical equations.

Here’s a typical example:

• Current monthly expense = 30,000

• Current annual expense = 30,000 * 12 + a 10% buffer = 400,000

• Assumed average inflation = 6%

• Years to retirement = 30

• Estimated annual expense during retirement = 400,000 * (1 + 6%) ^ 30 = 2,300,000

• Assumed rate of return during retirement = 8%

• Corpus required = 2,300,000 / 8% = 3 crore

Each such illustration leaves me wondering because,

• Most of us never see more than a few lacs in our hand in the first one-third of our lives. Yet we dream about a big magic stash of crores waiting for us right at the end of the second one-third of our lives.

• Have these experts/advisers who cook up such magic numbers out of nowhere personally amassed such a big stash using the same investment strategies that they now ask you to follow? My solid guess is that they too have seen just a few lacs here and there just like the rest of us.

• There are no intermediate milestones. So, for example, you start with 0 when you’re 30 and end with the stash when you’re 60.

• Inflation is always the shark. Equity SIPs are always the harpoon.

• 30-years of waiting? For what? Give me a break!

I personally believe that ERE is way better a strategy. You don’t need to wait for 30-years. You don’t need a magic stash. You see big progress each month. It’s honestly motivating. I know because that’s what I strive for each day.

Don’t believe those traditional retirement calculations. There is a better way.

What do you think?

Rakesh October 6, 2011 at 10:25 PM

Vinaya,

Good post, nicely explained. Even i am surprised when they come up with a figure of 4-5 crores. I like the quote – “Inflation is always the shark. Equity SIPs are always the harpoon.”

Rakesh

pattu October 6, 2011 at 10:40 PM

I agree such calculators have pitfalls, however
Unless you provide some details of how long you estimate your ERE to be your argument that ERE is better is not convincing.

Dr. Jacob lives with 3 % inflation. The average Indian lives with 8-10% inflation. You and I will retire before it reaches 3%. Personally I don’t think it ever will.

was 15 years for you.
If this means “natural debt inclination” more debt than equity I will bet that it would take longer than 15 years. That of course is assuming not every equity year from now is like the present one!

Please do correct me with details.

Vinaya H S October 7, 2011 at 5:58 AM

@Rakesh:

Glad you like that quote. :-)

@pattu:

A comment from you after such a long time. :-) “When Will I Achieve ERE?” coming up with all the details.

Sam October 8, 2011 at 12:54 AM

Vinaya, spot on! I think these numbers are pulled out based on how much the commissions will contribute to financial advisors’ retirement corpus :)

Vinaya H S October 9, 2011 at 8:24 PM

@Sam:

Good one!

kapil November 18, 2011 at 1:32 AM

good post!

amol November 18, 2011 at 1:50 AM