Retirement - The Rule of 1-30-6

So, how much would you require during retirement? It's difficult to guess and even more so to calculate. Considering the variables and calculations involved, it becomes difficult to arrive at a particular number. So, in this article we will simplify this calculation for you.

What Is this All About?

Well, we have derived a formula to ease your tension (at least from calculation perspective). That formula is ‘1-30-6’ (Pronounce it as 136).  

It says, that in 30 years, your monthly expenses will be an amount equal to your 6 months expenses today, considering current lifestyle is maintained. This rule improvises and builds upon another rule of retirement, the rule of 4%, which says that you should not withdraw more than 4% per annum from your retirement fund.

For eg. If you are spending Rs.100/month currently, you should start your retirement panning by assuming that in 30Years you will need Rs.600/month.

So, Annual Expense          -> Rs. 600 X 12 = Rs. 7,200.

As per the above stated rule of 4% withdrawal,

Corpus Required               -> Rs.7,200/ 4% = Rs.1,80,000.

Hence, you would require atleast Rs.1.8Lacs to retire for every Rs.100 of your current monthly expense. Using this formula, you can calculate your requirement accordingly.

However, while you have considered Rs7,200 as the yearly withdrawal that is not the case. Infact you will start with withdrawal of around Rs.5,200 as per below calculation.

 

Retirement Calculator
Current Expenses Per Month	₹100
Inflation	5.00%
Years to Retirement	30
Current Expenses Per Year	1,200
FV of current expenses on Start of Retirement	₹5,186

 

Why This Rule?

This basically improvises on the flaws of 4% rule for retirement, which says you should never withdraw more than 4% of your corpus. However, as inflation reduces the money value the 4% withdrawal will not be sufficient. Returns of 4-5% on your corpus won’t matter, as a reducing corpus due to withdrawals will be compounded, even though inflation will compound your expenses on increasing sums. So, while you may start with around 3% withdrawal, by end of 15Years, you would need to withdraw 4% and by end of 30^th Year, 9% of your corpus.

Assumptions while making calculations:

Inflation                                                 : 5%

Returns expected after retirement   : 6%

Life Expectancy                                    : 100 Years (Better to die rich than live poor)

You can use this excel to calculate your requirement to come to your retirement figure.

Tips to Follow:

• Each Rs.100 spent today, will mean you need Rs.1.8Lacs (asset, may be a house, gold or cash) extra on retirement, so either start saving more or spending less. And yes, living frugally is not such a bad idea, that’s how our parents lived and if you are reading this, I believe they did quite a good job.
• For further ease on investment part, invest the same amount as you spend, if you do so for 30 years, your investments will let you survive for 30 Years after income stops. To achieve this, invest first spend later.
• Do not underestimate inflation or the life expectancy, problems will not arise if we die, it will arise if we live. Also, don't overestimate your ability to generate returns while investing. Getting returns of 15-20%, consistently over a long period may be difficult. 

While, there is no way we can come with an exact number today for the requirement that will be there after some years and there is no rule which can fit for all, its better to make a start. Either you will achieve the goal or fall short, but if you won't start you will definitely fall short.

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