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Case Study – How Wrong Assumptions Can Destroy Your Happy Retirement Plans?

So you have finally realized that it is high time that you start investing for your retirement. And to help you with your planning, you have decided to make use of free-online-retirement-calculators.
The beauty of online calculators is that it is very easy to input a few numbers and see the results instantly. But the ease and convenience of using an online retirement calculators, should never undermine the importance of retirement calculations.
What I mean to say here is that just because of it is easy and you are using a few text-bookish assumptions,it does not mean that the magic number thrown up by the calculator is sacrosanct. And in most of the cases, it might not even be correct. You should always question it. Always.

Think of it. Are you willing to blindly follow an action plan set up (for the next 25-30 years) by an online calculator? Are you willing to take a risk on something, which will give you money to survive for 20-30 years after you have stopped earning? Its a big bet and requires you to take a really big leap of faith. And ofcourse, it is very scary.
Just imagine that a calculator tells you to save Rs 2 Crores (Crs) by the age of 60 years. And you diligently save and invest and somehow manage to accumulate Rs 2 Crs by the time you reach 60. Feels great.

Now when you started investing in your 30s for this corpus, the online calculator had an inflation assumption of 5%. In reality, it turned out to be 6%. Another assumption made by calculator was earning 8% annual returns on the corpus after retirement. In reality, things changed and safe bank FDs, where you had decided to park most of your money started giving just 5% annual return. The result…is that you are screwed. And screwed when? When you hit the age of 70 or 75. You have exhausted your corpus, not because you did not stick to your investment plan. But because situations changed and assumptions in your retirement planning calculator, did not remain completely valid in future.

Seems scary to run out of money at 75. It’s just like you run out of oxygen when you are doing deep sea diving and are 100 feet deep in water!
I am not saying that one should not use retirement calculators at all. All I am saying is that it is very important to understand that ‘Assumptions’ play a very big role in all retirement calculations.
Now these assumptions are also of 2 types.
First are the assumptions about the ‘Uncontrollables’. Things you cannot control. Some examples of these are assumptions made for return percentages, inflation, etc. You can do nothing to control these factors. You can only hope that your assumptions remain as close to reality as possible over the years.
Second are the assumptions about the ‘Controllables’. These are the factors which you can control atleast partially (if not fully). Some examples are your starting investment amounts, yearly increase in investments, etc.
In this post, I will simply focus on the assumptions we make about the Uncontrollables. And more specifically, lets focus on assumptions about the returns we expect to earn from our investments over the accumulation phase of retirement planning.
Now do this small 15-second exercise:
Close your eyes and think of a number (in percentage), which you think is most popular when people discuss about the expected returns from MF investments.
Thought of it? Great.
Personally, I have heard numbers ranging from 15% to 25%. Though I would personally love to get 25% annual returns, the fact is that it is not going to happen. No matter what anybody says, earning 25% every year is impossible. An annual return of 25% means doubling your money every 3 years. We need to be realistic and stop listening to brokers and agents.
So if 25% is bull shit, then is 15% fine? Honestly, it seems achievable. And there have been funds, which have done even better than that in past.

So is 15% a good assumption to make when doing retirement calculations?
It might be. I personally think that it is manageable in the long run. But common sense says that when I am making assumptions for future, I should be cautious.
These days, many people are talking about margin of safety (MoS). But mostly these people are using the term MoS, when discussing about individual stocks and value investing. But I feel that margin of safety is something, which should not be restricted to investing in stocks alone. It should also be considered when planning for your retirement.
But what is happening is that when it comes to personal finance, there are many who just blindly expect MFs to deliver 15% to 20% for next 25-30 years! I am not saying that it cannot be done. But I can bet that it will not be achieved by 99% of those who claim that it can be easily achieved. And I can bet my entire retirement corpus on it. 🙂
So lets come back to our case study:
Now 15% can be done. But when calculating the corpus needed for my retirement, I will take a much lower number. Say 12%. This straight away gives me a buffer of 3% to be wrong. So even when I am investing with 12% assumption, it is possible that luck favors me and I manage to earn 14% return. Will I mind it? Not at all. I love positive surprises. And who doesn’t?
But if I start investing with a 15% assumption, and I end up with returns of 13%, I will have trouble in my retirement years. And that is what I don’t want.
So with assumption set at 12%, lets do some number crunching. I will only share the findings and not the exact calculations to keep it simple.
Also, I will be tweaking the 2nd and 3rd scenarios for different rates of returns within the investment life. This is to bring these calculations closer to reality. So for theory and comparative background, you can read the 1st scenario. But focus more on 2ndand 3rd scenarios.
Scenario 1:
Current Age = 30 years
Retirement Age = 60 years
Accumulation period = 30 years (60 – 30)
Starting yearly investment = Rs 60,000 (~ Rs 5000 monthly)
Expected Average Annual Returns = 12%
Planned Annual Increase in Investments = 3%
Simply put, the expected rate of return in this scenario is 12% for the entire 30-year period.
The result is a corpus of Rs 2.31 Crores at the age of 60 years.
But lets make this more interesting. Lets split this 30-year investment period into 4 sub-periods:
  • Period 1 – when age between 30 and 40 years
  • Period 2 – when age between 41 and 50 years
  • Period 3 – when age between 51 and 56 years
  • Period 4 – when age between 57 and 60 years

Now an important point to note here is that returns earned in each of these four periods can be different. But in this first scenario, the returns have been put uniformly as 12% for all four periods spanning 30 years. The scenario is summed up in table below:

Retirement Corpus Planning 12%
As already mentioned, this is a good theoretical scenario, which assumes that returns over a 30-year period will be about 12%. Though it is theoretically correct to assume an average figure across a long period, I still feel that later years (after the age of 50) are way too far in future to be predicted correctly.
So to create a more realistic scenario, it makes sense to reduce the return expectations in later years.
Lets try to do this in second scenario.
Scenario 2:
A slightly more realistic assumption in later years is depicted in table below. The impact of lower returns is that one ends up with a lower corpus at the age of 60.
Realistic Retirement Corpus Planning
You might say that this exercise is just like assuming a lower than 12% rate of return for the entire 30 year period. And you are right in saying so. But its tough to make people believe that even MFs can give lower returns than 12% in later years. Just try telling this to someone who is already convinced that MFs will help him reach his retirement targets with ease, and you will understand what I mean.
We need to understand that the situation after 30 years is very far off in the future. And we have absolutely no way of knowing what will happen then.
Today, a return of 15% might look like normal. But we can never be sure whether the same 15% will be a normal thing in 2040 or not. It’s possible that the new normal might be 20%. And it is also possible that the new normal might be 12%. No one knows.
But when calculating our retirement corpus in future, it’s prudent to make assumptions of returns on the lower side, and those of inflation on the higher side.
So this 2nd scenario stands as follows:
Current Age = 30 years
Retirement Age = 60 years
Accumulation period = 30 years (60 – 30)
Starting yearly investment = Rs 60,000 (~ Rs 5000 monthly)
Annual Average Returns = Varies in 4 different period as shown in table above
Annual Increase in Investment = 3%
Retirement Corpus = Rs 1.60 Crores
That’s a cut of almost Rs 70 lacs!! (Rs 2.31 Cr – Rs 1.60 Cr).
Is this it? Can it get any worse than this?
The answer is it might. Lets take up the 3rd scenario now.
Scenario 3:
I know you will abuse me for such a pessimistic 3rd scenario. But here it is:
The returns in future keep going down to 5%. So between 30 and 40, returns are 12%. The next 10 years see a return of 10%. And the remaining 10 years see 8% in initial years and 5% in latter years. And the corpus? It comes to a paltry(!) Rs 1.27 Crs.
Sounds horrible. Right? Just a few percentage points lower in later years and the portfolio (as well as you) end up getting screwed!
Can you take this risk? The risk of having lesser money than what you expected after 30 years of investing?
I would not want to be in such a situation. And for that, if it means lowering my expectations and investing more, then so be it. I will do it as much as I can within my limitations.
Another assumption, which I have made in the above scenarios, is that every year, I am increasing the annual investment by just 3%. Though I have done extensive analysis of how you can become really rich by increasing you annual investments by 10%, the fact is that it is easier said than done.
Our salaries might get a 10% hike every year. And assuming a 6% inflation, we should theoretically have no difficulty in increasing our investments by even more than 10% every year. But no matter how well we plan, there are bound to be unforeseen, additional and recurring expenditures arising every year. A big electronic purchase which was pending for last few years (though even such purchases can be planned wisely), foreign trips (Yes. Trips can be planned too), unnecessary luxuries, etc.
And that is the beauty of expenses. The expenses have a bad habit of beating income increases every year. 🙂
A 3% increase is not recommended and is in fact very low. We should target a higher percentage every year. But since the theme of this post is pessimism, lets keep the annual investment increase at just 3%.
So till now, we have discussed that it’s an interesting (and useful) exercise to expect lower returns in later years of investment lives. So what should one do?
Suppose we take the corpus accumulated in 1st scenario as the target. That is, we need to have Rs 2.31 Crs at the age of 60. And for returns, lets take the expected rate of returns from the 3rd scenario:
  • 12% in Period 1 (30 and 40 years)
  • 10% in Period 2 (41 and 50 years)
  • 8% in Period 3 (51 and 56 years)
  • 5% in Period 4 (57 and 60 years)

So assuming that we need Rs 2.31 Crs at the age of 60, and with above given expected returns, how much should be the monthly investment?
That is the question, which we need to answer to complete this case study.
Now here, there can be two ways of achieving it.
First is where you start with a higher initial monthly investment (>Rs 5000 per month or Rs 60,000 annually) and increase it at the above discussed low rate of 3%.
Second is to start with Rs 5000 monthly investment (Rs 60,000 annually), but grow your contributions at a higher rate every year.
Here are the details of the first option.

Scenario 4:
Retirement Planning Higher Initial Amount
As you can see the table above, you need to start with a monthly investment of Rs 9100 instead of Rs 5000 (as in Scenario 1) and then increase your annual investments by 3% every year to reach your goal of Rs 2.31 Cr.
But what if you want to start with the same Rs 5000 every month? That brings us to the second option.

Scenario 5:
Retirement Planning Higher Annual Increase
In this option, you can start with a monthly investment of Rs 5000. But then you will have to increase your annual investments by 8.5% every year to reach your goal of Rs 2.31 Cr, given the lower return expectations set in 3rd scenario.
Now lets try to take another view.

I know the post is getting quite long. But please hear me out for some more time.
I am sure many of you would be saying that as soon as we approach the last decade before retirement, we should theoretically start moving away from equity MFs (the only one capable of giving 12%-type returns). But problem with moving away from an equity biased portfolio by the age 60 is something related to medical advancements! Yes. Don’t be surprised. Please hear me out.
What I mean to say here is that our generation has a higher probability of living upto 90 and 100 years of age than any of the previous ones. So if you completely move out of equities by 60, you will still have 30 post-retirement years to earn something on your already depleting portfolio. Isn’t it?
And I am sure to hurt many retirement planners when I say that even after reaching 60, one should keep a significant percentage of overall corpus in equity MFs. But having said that, consideration also needs to be given to a person’s risk appetite and not just the logic of higher life expectancy, which I gave above. But I guess that discussion is best left for some other day.
So that’s it for this post. Hope I was talking some sense in this post. 🙂 Please note that I have made return calculations in straight line (using % mentioned as expected returns). In reality, stock markets and mutual funds have volatile returns. One year might give 40% and other might give (-) 20%. And there can even be instances where there is Zero growth for 5 straight years! Almost anything can happen. 

The impact of case studies like these is that I am slowly but steadily lowering my return expectations. And this consequently, forces me to increase my contributions slightly with every such lowering-of-expectations-exercise. So think about what you just read above. And if you have some really high Buffett-type returns expectations from your investments, its time to get realistic about it. It is your retirement after all, not Warren Buffett’s. 🙂
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What I told a Frustrated Guy in Job. At 37, He Retired few Months Back – Part 3

This post was long due after I did Part 1 and 2 in April this year. Though the story of this guy was covered in first two parts, I wanted to do a follow up post highlighting some of the important points raised in comments of the post.

Readers like Krish, Bharat and many others made some noteworthy points, which I feel need to be shared with a larger audience and hence this post.

You can either read the complete story in detail in Parts 1and 2;Or just go through the broad outlines below:

This person had a big home loan, was earning decently, but just sufficient to make ends meet (after paying his monthly loan EMIs), had very little savings and investments and more importantly, was frustrated with his job and financial situation.

Luckily, he inherited a plot of land which till a few months back, he did not know what to do with. 

What he does afterwards, is what changes his life:

Step 1: Sold off the land plot for Rs 9 Crores (post tax).

Step 2: Closed his home loan of Rs 70 Lacs.

Step 3: Created an Emergency Fund of Rs 30 Lacs (which covered his family’s expenses for next 2 years).

Step 4: Put Rs 4 Crores in Fixed Deposits, which provide approximately Rs 1.75 Lacs every month in interests (post tax).

Step 5: Bought 7 flats for Rs 3 Crores

Step 6: Bought a small warehouse (godown) for Rs 1.1 Crore

Step 7: Put 5 (now 6) of these flats on rent for a total of Rs 1 Lac a month.

Step 8: Put Godown on rent of Rs 60,000 a month.

Step 9: Quit his day job

Note – Actually he quit his job before the godown went on rent.

To summarize, he used proceeds of selling his inheritance to create a monthly income stream of more than Rs 3 Lacs. His average monthly expenses are between Rs 50K to 60K.



Now this is the current situation. And we do not know what might happen in future.

But few readers raised concerns about this approach and shared some different approaches. I share their concerns and ideas below:

Point 1: Cashflow is great in terms of interests, rents etc., but over the years expenses also rise. Not only because of inflation, but also because of altogether new expenses like kid’s education, medical bills, renovations, etc.

Point 2: If investment in properties (flats) is made for capital appreciation, then one should understand that it is not that easy to sell off properties. Banks are generally skeptical about lending to buyers for older properties.

Point 3: Once again if investment in property is made for capital appreciation, it makes sense to buy in relatively undeveloped areas. Then wait for 3-5 years and sell them off. In this way, one can cash out on overall upgradation (read: development) of that area, and the increase in desirability quotient of that area. If one waits for more than 5-7 years, there’ll always be a problem of “Old Flat” perception.

Point 4: In rental properties, each time a tenant vacates, it requires big expenses in form of painting, cleaning, plumbing, unsolicited breakdown of utilities, etc to get the flat ready for next occupant. This eventually reduces the actual rental income coming from the property.

Point 5: Dependency on rental income often proves to be fickle and it does not even beat inflation. Since chances of real estate markets being in bubble currently are high, expectations of very high capital appreciation would be wrong.

Point 6: There is an increase in people seeking help / donations / loans when they realize that you are flush with funds and living off without working for anybody else.

Point 7: With so much money coming in every month, life style changes and expenses on luxuries like foreign trips, electronic gadgets tend to increase. These eventually reduce the surplus every month.

Point 8: Could have chosen not to close the home loan and continue getting tax benefits. The money could have been used to earn hefty interest.

Point 9: Plan of taking another loan (>2 Crores) and use the monthly surplus to pay EMIs can be a big risk as it greatly reduces the free cash available every month.

Point 10: Plan of starting a money lending business is a big no-no if one gives any weightage to peace of mind.

Point 11: All the proceeds from sale of property could have been put in debt funds (50% Growth, 50% Quarterly payout). After decent quarterly payout accumulation, the money could have been invested in Equity Mutual Funds and Residential plots in small towns as in long term, only MFs, Direct stocks and Land are game changing wealth creators.

Point 12: This person should not have quit his day job until his planned business had kick started. Any business started after inheritance is more of a time-pass and chances of it succeeding are pretty low.

These are few of the major points which came out of the discussion which took place in comments of the post. I personally do not subscribe to quite a few like not paying off loan (I love being debt free). But I also think that few of points like expenses related to properties are quite valid.

Overall, I think the approach taken has been quite prudent, driven by common sense and most importantly focused on generating cashflows. But finally, only time will tell whether its correct or not.

What I told a frustrated guy in job. At 37, he retired last month – Part 2

Before I continue from where I left in part 1, I will briefly summarize what happened earlier for benefit of new readers…

A few years back, I met a guy who was frustrated with his job and life. He had a big home loan, was earning decently, but just sufficient to make his ends meet every month. Surprisingly, he had a plot of land worth several crores which he till that date, had failed to utilize productively. 

In part 1 of this post, I suggested following 5-point action plan to him:

  1. Sell the land & use the money as described in steps 2 to 5.
  2. Pay off the home loan
  3. Create an emergency fund
  4. Set aside money in fixed deposit which would provide monthly interest income equivalent to his monthly salary.
  5. Buy flats and rent them out to create additional streams of income.

Now let’s continue with what happened next…

This guy gave me a call last Sunday and told that he had actually thought a lot about what I told him two years back. He then discussed the approach with his parents and other family members before taking a final call 6 months back.

What he did then is summarized below:

  1. Six months back, he sold off the plot of land for Rs 9 Crores (post tax).
  2. Almost instantly, he paid off and closed his home loan of Rs 70 Lacs.
  3. Parallely, he created an emergency fund of 30 Lacs to cover his family’s expenses for next 24 months.
  4. Five months back, he parked Rs 4 Crores in Fixed deposits, which now provides him with a post tax monthly interest income of more than Rs 1.75 Lacs (Much more than what he drew as his last salary).
  5. In next two months, he bought 7 flats worth Rs 3 Crores and managed to put 5 of them up for rent. Rental income from these 5 flats is more than Rs 80,000 per month. He is still waiting to put remaining two flats on rent.
  6. Just two months back, he bought a small warehouse (godown) for Rs 1.1 Crore. As of now, he is pretty close to cracking a deal with a logistics provider for renting out the property. Probable rental income from this property is expected to be around Rs 75,000 every month.
  7. With home loan paid off, and earning in excess of Rs 3.2 Lacs a month without going to office for somebody else, this person quit his job (read retired) after celebrating his 37th birthday last month.

How to use your inheritance
A brilliant example of how to use your inheritance

Astonishing…isn’t it? How life can change with one simple decision. 

A reader commented in part 1 of this post that this guy was simply lucky to have inherited such a plot of land. 

I am not sure whether its right to give all credit for this guy’s success to luck. Agreed that you need to be lucky to inherit something like that. But I assure you, mentally and emotionally, it’s not an easy decision to sell inherited properties. It’s a tough call to make. It may seem simple up front. But it is quite a difficult decision to sleep with. Anyways, we are not trying to judge anyone or anyone’s luck here.

The fact is that this guy does not need to work again for anybody else.

And for emphasis, I repeat.

This guy does not need to work again for anybody else.

And just to give you all an idea of how a person’s decision making changes when passive income starts flowing in….this person told me something, which will further astonish you.

He is currently earning Rs 3.3 Lacs from his investments. With renting of two additional flats, he might start earning close to Rs 3.7 Lacs. He told me that frankly speaking, he did not need more than Rs 50,000 every month for his normal expenditures. This left him with Rs 3.2 Lacs surplus every month. He himself suggested that he was thinking of choosing between the following 3 options to park his surplus funds:

  1. Take property loans (approx Rs 2.5 Crores) which would use up this Rs 3.2 Lacs in EMI. The property in turn could again be rented out to generate more cash.
  2. Put money in stock markets using SIPs in good mutual funds and direct equity investments.
  3. Start a small money lending business.

For the time being, it’s irrelevant what I suggested him and what he eventually chooses to do. But this tells how a person starts thinking of ways of making money once he is out of the mad rat race of getting salary every month. The decision making and thought process changes completely.

We talk about value unlocking in properties held by companies. And here we have an exceptional example of how normal people like you and me can unlock value from existing properties. Once unlocked, the money needs to be managed as prudently as possible. And with systematic approach like the one taken by this person, its now money which is creating more money.

By the way, he is not frustrated any more. 🙂

What are your thoughts on this?

______


What I told a frustrated guy in job. At 37, he retired last month – Part 1

Isn’t this like a dream come true for all of us? Atleast for those of who are not working for themselves but for somebody else?

This post is about a person, with whom I had a casual chat over lunch some two years back. At that time, I (in my wildest dreams) could not have imagined that this talk would have such a big effect on his life.

But as it has been rightly said in Alchemist,

“When you want something, all the universe conspires in helping you to achieve it”

…in hindsight, it now seems that our little chat was the catalyst for something big which was about to happen in that person’s life.

He called up last Sunday to thank me for the little chat I had with him two years back.

At first, I did not realize what he was thanking me about. But when he told me everything, it was like a jaw dropping moment for me.

I will share this story in two parts…

And the first part of the story goes like this…

While doing my MBA internship in an organization, I came across a guy who looked quite old for his age and was a quite frustrated with his life. One day while having lunch together, he became aware of my interest in stocks and wealth creation in general.

And this got him started. He then told me quite a lot about his personal and financial life.

Frustrated Man At Job
 

He had been working in that organization for last 15 years. He was frustrated because though he was earning well, he was still barely breaking even every month end. He stayed in a decent 2BHK flat in New Delhi, which he had purchased 2 years back using home loan. The loan still had almost Rs 70 Lacs of unpaid amount. And this is what ate up almost 60% of his salary. Apart from the house, he had almost nothing to show for savings. To be exact, he just had a couple of lacs in PF, and less than a lac in fixed deposits.

But he had something else which could be a game changer.

Sometime back, he had inherited a plot of land.

And this plot of land was worth almost Rs 7 Crores at that time!! Yes. You read it right. It was worth more than 7 Crores! And as of then, that plot of land was lying vacant and was not suitable for cultivation.

I was surprised when I came to know of this. I was surprised that even after being a big Crorepati (many times over), he was still working for someone else, and was unhappy with his finances!

What I then told him was simple common sense and none of the usual financial gibberish you get to read on this site 😉

I told him that if he was ready to take a decision based on simple common sense, his life would change for the good. But for that he would have to part with something which he had inherited. And that in itself would require a lot of emotional will power.

He seemed quite eager to know what I planned to tell him. And what I told him is listed in 5 steps given below:

  1. Sell that plot of land and use the money as described in step 2, 3, 4 and 5.
  2. Pay off the home loan of Rs 70 Lacs
  3. Create an emergency fund
  4. Set aside money in fixed deposit which would provide monthly interest equivalent to his monthly salary.
  5. Buy flats and rent them out to create additional streams of income.

This is what I suggested him two years back. And last Sunday, I received a call from him.

But I will share rest of the details about why he wanted to thank me in part 2 of this Post.

 

In 2 Minutes, I Can Tell You When You Will Retire!!

Read the title of this post again.This post will not help you to retire in 2 minutes. But in less than 2 minutes, it will tell you how long will it take for you to retire. And that too without having to make any big and complex calculations.

And you can do it yourself!

But for you to do it, you need to be familiar with TheRule of 72

What is Rule of 72?

Rule of 72 is nothing but a financial shortcut to calculate the number of years required to double your money.
 
How TO Double Your Money Rule Of 72
Rule of 72 | Calculate Time Required To Double Your Money
 

For example, if you want to know how long will it take to double your money at 12% interest, divide 72 by 12. The result is 6. And this 6 is the number of years required to double your money. It is as simple as that.

Lets take another example: At 8% interest, which is the average rate offered by banks for keeping your money in recurring deposits and fixed deposits, your money would double in 9 years. (How:  72 / 8 = 9 Years)

Note – This rule is applicable only for compound interests and not simple interests. Also it works better for smaller numbers.

Lets go further..

How to Use This Rule of 72 for Retirement-Years Calculation?

Please note that this post does not tell you about the amount required for your retirement. But this neat little number trick will tell you the (approximate) number of years required to reach that amount.

Let us suppose that you need Rs 2 crore as your retirement corpus. And as on date, you have a saving of Rs 6.25 lacs.

Note – I have chosen this strange figure of 6.25 to make further calculations easy.

The assumption here is that you are a rational human being, who doesn’t want to take too many risks with his retirement kitty. And neither do you want to earn comparatively lower returns offered by bank deposits.

So you decide to take a middle path of 10%.

This is higher than 8% offered by National Savings Certificates and bank deposits and and lower than 12% plus offered by inherently risky stock markets.

Now lets back calculate…i.e., starting from the final retirement requirement of Rs 2 Crore.

Mathematically, 72 divided by 10 is 7.20

Now if we get 10% per year for our investments, it will take 7.2 years to double our money. (Using Rule of 72, we know that 72 divided by 10 equals 7.2 years)

Now to double your money from an amount X to Rs 2 Crore, it will require the amount X to be 1 Crore. And using the Rule of 72, we have that Rs 1 Cr doubles to Rs 2 Cr in 7.2 years, i.e

1 Cr to 2 Cr = 7.2 years

Similarly,

50 Lacs to 1 Cr = 7.2 years (Total: 14.4 years)

And so on..

And the calculation continues as follows:

 

Money Double Rule Of 72

This simply means that starting from Rs 6.25 Lacs, it will take you 36 years to convert it into Rs 2 Cr, which is the target amount.

But wait…

I know you must be thinking that 36 years is too long for anyone to keep saving. But here is the magic. Did you notice that you started from Rs 6.25 Lacs? And you ended being a Crorepati, twice over.

But you did not put in any new money in these 36 years!!

Yes. You need to understand that it takes 36 years to convert Rs 6.25 Lacs to Rs 2 Crore without any additional investment and without doing anything in stock markets. 🙂

That is the power of starting early, when it comes to investing.

The above example is a very simple and basic usage of this Rule of 72.

So in case you decide to make additional investments every year, you can reach the target of Rs 2 Cr much earlier than 36 years.

For example, if you additionally invest Rs 1 Lac every year, then you can reach the goal by 27th Year.

And if you somehow manage to save Rs 2 Lac every year, then you can reach your goal in less than 23 years!!

Try doing 3 Lacs an year and you will retire in less than 20 years. Doing 3 lacs an year means doing 25,000 every month. And if you earn decently, then saving this amount every month towards your retirement should not be very tough.

Warning: This exercise to calculate these numbers for your own retirement can be a scary one. But it clearly illustrates that if you decide that instead of going for one time investment, you are ready to contribute regularly to your retirement fund, then you can drastically reduce the time required to reach your retirement target amount.

So how much are you targeting to save for your retirement? And how much time will it take?