During my brief stint in one of the Big 3 head hunting firms I met nearly 200 + candidates hunting for a change . There was a common theme cutting across most of them. 80% of them were 40+, bored with their job, felt they were getting a raw deal and that their potential was far higher. They were all experiencing the impact of the Pyramid Effect after nearly 20 years in the industry.
Once you start talking to them ( and they talk a lot !) more common themes emerge – Should I change Industry, should I start a business (Restaurant & Head hunting firms are top picks!), maybe I left US too early and should have stayed on and finally – How much do you think is a good corpus to retire!
The last question is an interesting one and merits more attention.
Lets look at how life has changed in the last 30 + years. Rice Rs 4 / Kg – Rs 40 / Kg (10X) , a Gas Cyliner of Rs 60 is now nearly 600 + (10X) , A loaf of Bread that cost 2 Rs is now Rs 20/- (10X) , Petrol was about Rs 10/L – currently Rs 70/L (7X, and we thought Petrol had the steepest hike), Bhindi that costed Rs 4/Kg is Now Rs 40/- (10X). Cal – Chennai one way on Indian Airlines was 1K ( I remember that clearly since that was the first flight a family member took in 1983 to attend my sisters marriage) – Now it varies from 5 – 10K , One USD was = 10 INR and now its 55 ( 5.5X).
I am not an economist and this may not be very scientific but we can draw an inference that when it comes down to day-to-day expenses the costs have gone up by about 10X in 30 years.
This does not take into account the cost of property. That has grown astronomically – I recollect a relative buying a 5000 sft plot of land with a bungalow in Alwarpet , the heart of Chennai for Rs 1 Lac in 1980. Today that property would cost upwards of 10 Crores ( 1000 X appreciation)
The salary of a Sr executive in a private firm 30 years back was about Rs 5000/- month (Taxes at the highest limit were 90% and the Presidents Salary at 10K / Month was the maximum limit).
So if cost of most items have gone up by 10X – then an corresponding increase in salary to 50K/ month should have been good enough – but that’s not true. Entry-level salaries for engg graduates from Tier 1 institutes are 7 – 8 Lacs / annum and Sr executives with 20 + years are unhappy with 50 Lac packages.
Can you manage a household for 50K a month in Bangalore or BBY or Delhi ? Yes many do – but for people who are my FB or Linked in friends that’s not true. At a very conservative level the monthly expenses for a family of 4 can vary from 1 – 2 Lacs / month. That’s nearly 2 – 4K USD / Month ,
when you look at it that way you realize that not many in the US spend that much every month.
So what has changed? Lets shift gears to the 1st chapter in my class 10 ICSE Economics Book by Khosla & Khosla. The author had beautifully explained two concepts – 1. The difference between Desire & Want (A Desire backed by necessary means and the willingness to partake with the means is a Want) and 2. The concept of Necessity, Comfort & Luxury and how these brackets vary from person to person based on their social strata.
Lets now take these concepts and see what has changed and then come back to the original question of How much is enough ?
30 Years of economic growth has made Luxuries & Comforts a Necessity . Today a good car, eating out once a week or an annual holiday ( Vs the visit to Grandparents house) is considered a necessity. Kids Birthday bashes are no longer an evening affair at home. New clothes are no longer events that happen in Diwali or Durga Puja but at every second month or the weekend sale.
It’s a combination of two things – having tasted blood for the Good Things in life you want more and of course there is peer pressure. And today we are ready to partake the means to fulfill our wants – even if it means taking a loan and bearing the burden of a monthly EMI.
Before we do the math – some questions that bug me
- In the next 30 years (say when we are 70) – will the cost of goods be 10X more expensive than today. So should we expect Rice & Bhindi to be Rs 400 / Kg and a gas cylinder at Rs 6000/-
- In Countries like the US & UK where per capita income is in excess of $ 35000 (India just crossed the $ 1000 mark) – cost of fruits / vegetables / Petrol is already at par with India. So should we assume that with increasing development the costs will continue to spiral?
- Inflation in India which is at ~ 10% needs to come down – Inflation is like rust , will it come down to 2 – 3 % ? (Which is why I like the RBI Governor who is holding on to pressure from the Finance Ministry and not reducing Interest rates till Inflation climbs down)
Depending on the answers we can arrive at some estimates. One way to look at it is that when you are 70 if you need 10X what you need today – you will probably need 5 Lacs / Month . I am assuming that you are not downsizing and continue to maintain a certain lifestyle that you are accustomed to. Lets also assume that with just husband & wife and lesser needs to impress society that reduces to 2 – 3 Lacs / Month.
At a 10% interest your tax-free income is 7%, to get 2 Lacs / Month or 24 Lacs / Year you need a corpus of 3.5 Crores in a FD. ( Remember if Inflation comes down you will not be getting 10% interest)
With medical costs spiraling and chances of Public Health systems not improving much you need to put away a Corpus to take care of your health in case of something serious. Lets say you put away Rs 1 Crore when you are 50 to multiply over the years so that at 70 that’s maybe 2 – 3 Crore’s + (that may not be sufficient – so ensure that you have good health, exercise regularly , clean diet !!)
You would like to travel and holiday, lets budget another Rs 1 Crore at age 50 to be kept in a Corpus for Holiday & Entertainment & Fun , between the interest and some corpus dilution every year you can manage for the next 20 – 30 with some decent holidays.
So if you are in a position where you have taken care of all your children’s higher education, marriage expenses (at least 1 Crore / Kid assuming they study in India over the next 10 years), have a house that is fully paid off and have no other liabilities then maybe a kitty of 5.5 Crores (That’s 1 Million $) at age 45 – 50 should be good enough to pull you along. This can be a combination of both assets & liquid cash – rental income for a second house may be a good hedge given the rate at which property prices have risen in the past.
Unless you have a windfall profit from stocks or real estate its difficult for a salaried person to make that money in his 20 – 25 years of career. (In one my future blogs I will share some insights on the power of Compounding – while it may be a bit late for us in our 40’s to leverage this , its a good learning for the future generation )
For all those who are there – enjoy your retirement! For others like me it’s back to the grind for many many more years.