Since people differ in lifestyles, needs, and priorities, why do we have a standard approach to building a retirement fund?
When building a retirement fund, budgeting is the first step, and there is no set ratio such as 50–30–20 that works just fine. A person earning 10,000 rupees a month should first manage his/her hygienic needs, then focus on leisure or savings. In addition, it would be inappropriate for someone earning 10,00,000 a month to spend 5,00,000 on his/her needs. Hence, suggesting a fixed percentage doesn’t work in real life.
Firstly, let us understand how needs differ from wants. Needs are things on which a human can’t compromise to spend less. For example, Education, Grocery, Rent etc. Although quality can be compromised, needs cannot be eliminated. Wants are things without which humans can survive and live comfortably. For example, smartphones, gadgets, holidays etc.
Secondly, everyone has life goals. Whenever such events occur, a relatively large outflow is needed. Hence, planning and budgeting needs to include this in calculations. To ensure smooth operations and a smooth handling of finances, it is critical to anticipate loan requirements and mortgage servicing.
Lastly, in choosing the correct investment strategy, age and investment span should be considered. For example, if I am in my 20’s, I can be very comfortable putting my money in equities for the corpus. However, if I am in my 50’s and planning to retire in the next few years, I would abstain from going all in on equities.
Considering all this, you can use the calculator below, input your data in the yellow highlighted fields and get the picture of how effective is your plan for retirement.
Downloadable Google Sheet: