Living for today sounds very good in the self-help books you may be reading, but really living it in your money life may not work. Unless you begin to plan for the time you are no longer able to leverage the human capital to earn an income, you are likely to see a drastic drop in living standards in the future.
The more time you have in your hand, the lesser you need to save. And simple math proves it. Sample this: You are a 25 years old and are 35 years away from your retirement. On the other hand, your 40-year-old boss will retire in another 20 years. Suppose, both of you want to save Rs1 crore for your retirement when you hit 60 and invest in an instrument that earns 8% tax-free returns per annum. Simple calculation shows that while you will need to save about Rs. 58,000 per annum, your boss will have to shell out almost four times of that every year - Rs. 2.19 lakh.
While starting young works well, but the question remains - how much saving is enough? Is there a thumb rule that works? While the exact number will vary according to goals, personal net worth situation and a host of other factors, there is a very rough rule of thumb that you can use to find out how you are doing. The mantra is: save your age. If you are in your 20s, you need to save 20% of your income, 30% if you are in your 30s and so on.
Suppose a 30-year-old earns Rs10 lakh per annum as income (that grows at 10% per year), spends 70% on current needs and saves 30% for the future. He does this for 30 years - increases what he saves each year to match 30% of income. In 30 years, assuming an 8% rate of growth of his savings, he would have a corpus of Rs13.48 crore. We now assume that this person will need half his salary at age 60, which is Rs79 lakh to live a retired life. Assuming that he has a paid up house and no other liabilities. At 7%, the saved corpus will generate an income that exceeds current needs and can be reinvested to take care of inflation-linked income needs in the future years.