Summary of this article
If a person starts at 20 and saves 20 per cent of income, they can withdraw the inflation-adjusted equivalent of around 52 per cent of their current income every year in retirement.
Saving 30 per cent raises this to approximately 78 per cent, while saving 40 per cent produces retirement income equal to around 104 per cent of current income
Investment returns also matter. If the portfolio earns 12 per cent instead of 8 per cent, someone saving 30 per cent from age 20 can withdraw approximately 299 per cent of present income in retirement.
Financial independence depends on three things: how early a person starts, how much of their income they save and how effectively those savings are invested.
Consider someone who starts working at 20, retires at 60 and wants their retirement corpus to last until 90. Assume that income rises with inflation, the same percentage of income is invested every year and retirement withdrawals also rise with inflation.
For this calculation, inflation is assumed at 6 per cent annually. The portfolio is assumed to earn the same return before and after retirement. Taxes, investment costs and market volatility are excluded, and all figures are expressed in today’s purchasing power.
Under the most conservative scenario, the portfolio earns 8 per cent annually.
Says Arun Patel, founder and partner at Arunasset Investment Services: “If a person starts at 20 and saves 20 per cent of income, they can withdraw the inflation-adjusted equivalent of around 52 per cent of their current income every year in retirement. Saving 30 per cent raises this to approximately 78 per cent, while saving 40 per cent produces retirement income equal to around 104 per cent of current income.”
For someone earning Rs 1 lakh per month today, this means retirement income of approximately Rs 51,800 a month at a 20 per cent savings rate, Rs 77,700 at 30 per cent and Rs 1.04 lakh at 40 per cent.
“The 30 per cent savings case is stronger than it first appears. Someone saving 30 per cent is living on the remaining 70 per cent of income. Retirement income equal to 77.7 per cent of total income would, therefore, be slightly higher than the amount the person was actually spending while working,” informs Patel.
This suggests that someone who starts at 20 and consistently saves around 30 per cent of income may be able to maintain their lifestyle in retirement even if the portfolio earns only 8 per cent.
Starting late, however, changes the picture sharply.
At an 8 per cent return, saving 30 per cent from age 20 produces retirement income equal to around 77.7 per cent of present income. Starting at 30 reduces this to 52.6 per cent, while starting at 40 reduces it to just 31.7 per cent.
For someone earning Rs 1 lakh a month today, that is the difference between retirement income of approximately Rs 77,700, Rs 52,600 and Rs 31,700 a month.
The same pattern holds at a 40 per cent savings rate. Starting at 20 produces retirement income equal to around 103.6 per cent of present income. Starting at 30 reduces it to 70.1 per cent, while starting at 40 produces only 42.2 per cent.
“In other words, someone saving 30 per cent from age 20 still ends up with far more retirement income than someone who waits until 40 and then saves 40 per cent. The early starter can withdraw around 77.7 per cent of present income, compared with only 42.2 per cent for the late starter,” says Patel.
At an 8 per cent return, delaying the start from 20 to 30 reduces retirement income by around 32 per cent. Waiting until 40 reduces it by approximately 59 per cent. Saving more later helps, but it cannot fully compensate for the years of compounding already lost.
Investment returns also matter. If the portfolio earns 12 per cent instead of 8 per cent, someone saving 30 per cent from age 20 can withdraw approximately 299 per cent of present income in retirement. At a 14 per cent return, the figure rises to around 587 per cent.
“These numbers show the power of compounding, but they should not be treated as normal planning assumptions. With inflation at 6 per cent, a 14 per cent nominal return amounts to a real return of roughly 7.5 per cent. Achieving that consistently through 40 years of saving and another 30 years of retirement would be highly ambitious,” observes Patel.
Returns also do not happen automatically. Savings must be invested in a diversified, long-term portfolio and reviewed periodically. Investors must avoid common mistakes such as stopping investments during market declines, chasing recent winners or leaving too much money in assets that fail to beat inflation.
Money management creates the surplus. Investment management ensures that the surplus grows at the rate assumed in the financial plan. The message is simple: “start early, aim to save around 30 per cent of income and invest consistently. Financial independence is not built by chasing extraordinary returns. It is built by saving enough, investing well and giving compounding sufficient time to work,” Patel adds.
