One of the questions from The 4-Hour Work Week (note: there’s still some time left to participate and win a copy of the book) that really struck out was –

What is the pot of gold that justifies spending the best years of your life hoping for happiness in the last?

Déjà vu, because, a few months back, I had asked pretty much the same question when writing about the fallacy of traditional retirement calculations and had then followed-up on that post with this exceptional art of finance sketch by D –

An art of finance sketch depicting the fallacy of traditional retirement

I stand by all of those questions that I asked back then (in fact my conviction in them has only grown stronger). And then to add –

  • This problem is further compounded by the fact that the media is often plastered with ads (such as the one below) for traditional retirement that lure you towards that hypothetical pot of gold that magically appears out of thin air and falls into your hands the moment you turn sixty. But in a twist of fate, you then realize that due to some weird and arbitrary commuting (withdrawal) laws and fractions and compulsory annuity for the remaining fractions things don’t really add up to that pot of gold.

Image of an ad for Traditional Retirement

  • I haven’t invested even a rupee this far in any of those multi-decade pension (deferred-life?) plans and I don’t have any plans whatsoever to do so in future. Not even in the New Pension Scheme (which given the way things stand today could very well turn out into a No Pension Scheme).

  • Early retirement to me means voluntary paid/unpaid work be it of my own industry or for someone else (if you look around there’s an incredible amount of that available) and certainly NOT NO WORK or WORK FOR WORK’S SAKE (W4W as coined in the book)!

Finally, here’s another point from the book to ponder over –

[Traditional] Retirement as a goal or final redemption is flawed because most people will never be able to retire and maintain even a hotdogs-for-dinner standard of living. Even one million is chump change in a world where traditional retirement could span 30 years and inflation lowers your purchasing power 2 — 4% per year. The math doesn’t work. The golden years become lower-middle-class life revisited. That’s a bittersweet ending.

A commentary of thoughts running in my head…


The Art of Finance: The Lure of a Pot of Gold

by Vinaya HS on December 19, 2011

in Finance

I asked D to create a sketch as a follow-up to my post on The Fallacy of Traditional Retirement Calculations.

She created magic!


Sketch © D.

And here’s the complete set of responses that I received for the December book giveaway contest. I’ll announce the winner tomorrow.

Meanwhile, can you guess the winner?

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The Fallacy of Traditional Retirement Calculations

by Vinaya HS on October 6, 2011

in Finance

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?


I first read about this pension plan in the ET dated June 22, 2010. I was intrigued. Basically, Reliance Life Traditional Golden Years Plan is a regular premium retirement plan that provides guaranteed return, which is declared at the beginning of every financial year during the product term. So far so good. But,

The minimum guaranteed accumulation rate [in other words, the return] will not be less than the savings bank deposit interest rate, as declared by the Reserve Bank of India.

WTF, mate? What kind of guarantee is this?

Next, I ran the numbers through this calculator — assumptions were 35 years policy/premium paying term and a monthly premium of Rs 6,000. Over a period of 35 years, you pay a whopping 6% of your total premium as Premium Allocation Fees and Policy Administration Fees. To further add insult to your injury, you also pay around 1.2% of the accumulated value at the end of each year as Account Administration Fees.

A guaranteed tension plan in my opinion.

My advise:

Over a period of 35 years, you’d do FAR FAR FAR BETTER simply by saving the same Rs 6,000 each month in a Public Provident Fund account.

What do you think?

{ 1 comment }

Tweets on 2010-05-26

by Vinaya HS on May 26, 2010

in Finance

Mithun asks,

I read your research on pension plans. But what exactly do you mean by “Save each month. Compound your savings in debt instruments…???”

Simple. Rather than paying an obscene premium for 30 years and making the life insurance company obscenely profitable while you receive a paltry pension, you can build a very decent corpus for yourself (and retire off the interest generated) by opening a Public Provident Fund account and saving the maximum possible each year (currently Rs 70,000) for 30 years.

What do you think?


Tweets on 2010-05-19

by Vinaya HS on May 19, 2010

in Finance

  • Pension Plans or Pension Scams? That's what my research on retirement plans offered by life insurance companies in India indicates. #
  • Pension Plan Mathematics of Life Insurance Companies in India. God can't interpret it. I bet. #
  • Save each month. Compound your savings in debt instruments. You'll do FAR FAR FAR better than any Pension Plan. #
  • Reliance Total Investment Series II Term 10 Plan – Pension. How do you credibly say this to someone who asks about your retirement planning? #