I am not an expert on retirement and planning for life after sixty (if that is what defines the term ‘retirement’).
I am also willing to bet that anyone who has never retired can never be an expert on this subject (you can only be an expert in things you do), however sagely an advice he/she can offer on how to plan a life after retiring from active work.
But in planning and working towards my own retirement, here is one big mistake I see most retirees (and to-be-retirees) make and how it can be a such a dangerous mistake.
I’ve never heard it mentioned by retirement experts. Nor have I read a word about it in retirement books.
Everyone talks about saving money and allocating it well so that you accumulate enough to spend through the 20-30 years of your post-retirement life.
This is a good advice, but one that misses a big point.
That one big point that most retirement plans miss, and I believe is a grave mistake, is that of giving up all active income after retiring from work.
When I say ‘active income’, I mean the money you make through your work or through a business you own. Passive income refers to the income you get from your investments or rental income from property.
Now, you can increase your active income by working more. But the only way you can increase your passive income is by getting higher rates of return on your investment.
So when you give up your active income, two bad things happen:
- You lose connection with your active income, and it’s very hard to get it back with each passing month.
- You see a decline in your ability to make smart investment decisions because of your dependence on passive income.
Idea of Retirement
The idea of retirement that is sold to everyone is wonderful….
Just put a portion of your income into an investment account for 20-30 years and then withdraw from it for the rest of your life. Once you retire, you won’t have to work anymore. Instead, you will fill your days with fun activities like travelling, golfing, going to the movies, and visiting the kids and grandkids.
But consider this: A retirement lifestyle for two, like the one I described above, costs around Rs 3 lac a year currently (Rs 25,000 per month – a conservative assumption for life in a city/town).
In the next 20 years, assuming an inflation of 10% per year, this is going to rise to around Rs 20 lac!
How big of a retirement account do you need to fund that?
Let’s assume that annual inflation remains at 10% for your 20 years after retirement, then the total investment corpus you must have at 60 (when you retire) is around Rs 13 crore.
Now this does not assume exceptional items like a big healthcare costs you may have to incur in old age (given our lifestyles, the probability is high!).
Anyways, some more basic math tells me that if you are my age, i.e., 35, and have zero investments to start with, you need to invest a minimum of Rs 40,000 per month at an annual return of 15% to reach the Rs 13 crore target over the next 25 years i.e., till the age of 60.
Saving Rs 40,000 every month is a big deal for most of us. Over that, getting 15% consistently over, say, 25 years may not be impossible, but it’s difficult given the way most of us invest (recklessly).
Feeling down and depressed reading all this? Don’t be!
There’s a way you can start working on your life after sixty that’s going to help you immensely – financially and emotionally. And that great way is to…
Keep Walking!
That’s what a Johnnie Walked ad campaign tells me. In the context of the retirement plan I am talking about, you can change this to – Keep working.
Instead of relying on passive income to keep you and your house running after retirement, a better plan is to also work toward creating an active income to support you in those years.
After all, I’m sure you don’t want to spend your retirement days studying the market and your evenings worrying about your investments.
What is more, when you keep earning money from your work, you would continue to feel good throughout your retirement years.
You see, retirement isn’t supposed to be filled with money worries. And yet, that is exactly what you are planning to do by planning to stop earning active income after sixty and thus wanting to get above-par returns on your investments now.
There is no point in searching for stock tips that will earn you 20-30% returns per year for the next 25 years. Such stocks don’t exist. Even if they exist, you are only going to find them in hindsight, or from someone who has already made his money on them.
Don’t get me wrong here – I am not against investing for retirement to create a stream of passive income. That’s very important, and something you must do.
But what I’m trying to say here is that relying only on your investments / passive income can be a dangerous strategy.
“Retire at 40 and travel the world” is a nice dream to have, but one that may lead the dreamer to take many a missteps towards that goal – like wanting to earn more money faster.
Claim Your Retirement
There are many ways for a retired person to earn a part-time, active income.
You could do some consulting, tutoring, start your own online business, blogging, or earn money doing any sort of purposeful work.
For instance, apart from Safal Niveshak, here are a few ideas I am working on to keep doing purposeful work and let the active income coming to me throughout my life, whether I am forty, sixty, or eighty –
- Writing
- Education
- Online Selling (my wife’s business)
Apart from these, there are several other ideas that I plan to work on to create more active income streams for the rest of my life.
You see, I am not saying that you should give up on the idea of retirement. On the contrary, I’m saying that retirement might be more possible than you think.
But it’s important for you to replace the old, faulty idea that retirement means living off passive income only.
Imagine a new picture of what your retirement can be: a life free from financial worry that includes lots of travel, fun, and leisure, funded in part by active income from doing some sort of meaningful work.
The first benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to.
But the other benefit – and no one talks about this – is that it will allow you to make wiser investment decisions because you won’t be a slave to your investments.
You got my point, right?
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I am almost retired. “Safal Niveshak” preaching slavery. Wasted a part of my great day otherwise. I have plenty of my friends who have taken voluntary retirement a couple of years to 15 years back. “To keep working ” is one of the worst advice I have ever heard. What kind of blog is this? Have you even created a work-sheet for say 40 years? 2 Crores, invested at 8% per annum, is much more than enough for 25K p m. Dont write just for the sake of putting something on the blog. You may end up with 50+ crores.
Inflation 10%
Balance 20,000,000
Annual Takeout 3.0%
Remaining Interest 5%
Monthly Exp 25,000
You missed the core of my article. My thought is about “working for yourself” (and not slavery to someone else) to create an income stream so that you are not 100% dependent on passive income.
Plus, how many people have the starting capital to create that kind of a base to earn the passive income that is required after retirement (especially given the rising inflation and spending needs)?
Plus, as I mentioned at the end of the post, the first benefit of including an active income in your retirement planning is that you will be able to generate more money when you need to. And it will also allow you to make wiser investment decisions because you won’t be a slave to your investments.
hello Yaarth,
This is Vishal’s personal blog and it’s quite natural that not everyone has to agree with his perception. However, you don’t need to use harsh words such as “worst advise” or phrase like “sake of putting something on the blog” to express your view. It’s just an opinion. Argument should be healthy.
On a side note, working after retirement is a wise advise. In fact, you might have worked all your life doing something you don’t like. May be after 60, it’s time to choose something based on your passion. Nice thoughts Vishal.
Sir, indeed this is the greatest and wisest retirement advise I have read/heard. Active working will not only add to income but to longevity and quality of life making one more respectable in society, friends and FAMILY.
Thanks for the good article. One question how did you calculate the figure of 13 crores. 13 crores roughly translates to $2.2 million dollars. Even by US standards this figure is extremely difficult to achieve for upper middle class. By Indian standards this figure is nearly impossible for upper middle class families.
@ Manoj — Is this such an impossible figure ? With much higher salaries these days , I assume the Indian upper middle class should have a networth anywhere between 13-26 crores when they begin retirement 30 years from now.
Their is some error in calculating figure of 13 Cr
If you assume even 1% inflation adjusted returns for 20 years after retirement the figure comes out to be 3.61 Cr as per following calculation.
PV – ?
Rate – .01
NPER – 20
PMT – 20L
FV – 0
Ans PV = 3.61 Cr
Dear Vishal,
People seldom believe what havoc inflation can play to their investments unless they experience it themselves !
I think you are right with the calculation, I checked the same on this link by putting 10% inflation, 40K SIP, for 25 years. Without inflation adjusted the Future Value is 12.97 Crores and with Inflation adjustment its 2.38 Crores.
Vishal kudos to you for being so multifaceted and passionate about diverse things like writing, education and of course investing. I immediately subscribed to the life school letter. It sounds very promising.
It is not that you have said the last word about retirement planning here, but at least you dared to look at it with a new pair of eyes. Many a times a retirement plan starts and ends in Excel. I feel that is dangerous. There is a tendency to be mathematically accurate (only) here and thereby often oversimplifying things. Loved your approach. Thanks for sharing this with all of us.
Wonderful as always. Rental Income stream is best one and consistent. My parents are not planned anything on retirement but they are getting enough rental + their interest income. Also My company and brothers company takes care of their Healthcare cost.
But it is really nightmare that Can i save Rs 13 crore? ohh…god then 24 hours will not be sufficient.
It’s excellent that you’ve focused on the point which gets ignored. However the basis of this article is that one needs to be fit (mentally importantly and ofcourse physically) post retirement. My father for example has used the stock markets study and watching sports to keep himself active…having a pursuable hobby and activity is most important.
Hi Vishal,
Idea of retirement is to save enough so that you are free of pursue whatever you like to do irrespective of the income stream. Since you are already pursuing your goals you should consider yourself already retired and and hence there is no question of retiring again at 60. But not every body is as fortunate as you or does not have enough guts to follow their dreams without financial stability which initially might not be able to replace their current income.
I work for a software company and do have plans for some start up but not enough guts since that would mean loosing current income stream and risk of failure. But the day I can accumulate enough wealth, I would be able to work on my pet projects. I know its a mental block but that’s how it is and there are many like me sailing in the same boat.
60 years is a just bench mark where you legally retire and idea is to save enough by that time so you can follow your passion. Earlier you can retire is better.
Regards,
Dinesh
While lots of interesting things are said about retirement and how to deal with post retirement life as far as finance goes there is something even bigger than the cost of living. You could have umpteen number of calculations to prove what is enough for next N years of ones life post retirement and how to ensure that is met. And the meanest of those calculation might tell one that you need a huge chunk of money. And now is the interesting part – either you have that chunk or you do not.If one did not and believed in the calculation, might continue to work in some form or other.
But what in case one is convinced with finances but not sure what t do with life. Keep in mind more than half the time one is awake is spent at work place. How would one invest that time. Money making is fine but if that seems futile (no need for it) what to do with time?
Masterpiece…I was a class one gazetted officer…May have retired in 2025 with a monthly pension of appx 1 lakh/medical covered…am retiring next year with 2 CR in account and monthly interest income of appx 1.45 lakh…45000/ month saving….am on course to retire at 35…all comments solicited…advise moreso….
Life has more than basic maths to deal with….20 years back, travelling in Delhi from railway station to IFFCO Chowk was appx 70 Rs…it’s 12 Rs now….cauliflower is still 10 Rs/KG as was 5 years back (just know when to go to Mandi- maybe after 9PM)…fees in general hospital is about 10 Rs a visit ….staying fit still needs 5kms run a day….now….which 13 CR are we talking about…have a look at Mukesh Ambani,, with 130000 CR, he eats less than what I do…
Perspective….build a decent perspective about life and less overtures….life is less complicated than what we blog it into….
Mix of simple yet flamboyant,,,cheap yet expensive,,,slow yet fast,,,……that’s life to sum it up…PERSPECTIVE
Just what I wanted to say!
For us our expenses in one of the most expensive cities in India have been far less than those in one of the most livable yet cheap cities. Yes living has become expensive but if you actually look into what has become most expensive it is not the things you need. Instead it’s what you think you need or what you want. We believe we can retire for one third of the amount.
Did you retire this year in March? Also I would love to talk to you about how you decided to pull the plug. Anyway I can contact you?
There are many important aspects of retirement planning which sadly all companies are missing :
1) three step accurate retirement calculator for finding out exact amount of corpus, inflation adjusted tax efficient withdrawal amount pm, & investment needed pm or per year or lump sum to achieve that withdrawals is first & foremost requirement.90% of calculator fails in giving right figures.
2)proper asset allocation model is needed with proper research of schemes ideal for retirement savings parking has to be identified,no purchasing of ulips or otc kind high sounding mf schemes from desk of mutual fund advisor or bank HNI service desk is right way of investing for retirement .
3) portfolio rebalancing is most critical in pre retirement phase which mitigates risk as the retirement age approaches.d) last but not least all withdrawals has to be inflation adjusted along with tax efficient,if retirement planning is missing these vital points, avoid them.
Thank you for your post!This tutorial is fabulous! Lots of great info including, but as soon as you can. Ideally, you’d start saving in your 20s, when you first leave school and begin earning paychecks. Retirement Planning Advisor say that’s because the sooner you begin saving, the more time your money has to grow.