Your good friend earns more than you and not surprisingly, he also spends more than you. This makes you feel like he is richer than you, and you think that when you both retire, he is going to lead a much more comfortable and ‘affordable’ retired life. This may not be necessarily true. To put it on record, a good current salary is no guarantee for a comfortable and well-funded retirement. Let’s use data to prove our hypothesis.
Let’s assume that you and your friend are 30 years old with no savings. Your friend starts his earning career at 30, and earns a handsome salary of Rs. 5 lakh a year. In comparison, you only earn Rs. 2.5 lakh a year, i.e., just half of what your friend earns! Seems like a sad start, no? Read on.
In this example, it is assumed that both you and your friend are able to get a 10 per cent salary hike every year up to retirement (60 years). But there is another difference between the two of you, besides your salary. Your friend is a spendthrift, and is only able to save (and invest) 10 per cent of his annual salary. However, you have a tighter control over your finances and are able to save 25 per cent of your salary. Mind you, you’re still drawing just half of what your friend earns every year.
Now, what do you think will happen on the day you both retire? Who will have a bigger retirement corpus? The answer might surprise you, but you know what? It’s going to be YOU!
You, even after earning half of what your friend made all through your life, are able to create a bigger corpus. You end up with a corpus of Rs. 5.02 crore,and your friend ends up with a crore short at Rs 4.02 crore. How is this even possible?
The answer is that you saved and invested more than your friend. Add to it the fact that you (and your friend too) were sincere enough to allow your money to compound. If you are interested in detailed calculation, take a look at the data below:
This example clearly shows that even though earning a high income is desirable, it is not the only requirement that needs to be fulfilled for a successful, well-funded retirement. You also need to rationalise your expenses and invest as much as possible. Another important thing to note here is that your friend has a more lavish lifestyle than yours, and this is deduced by his lower savings rate. Now considering that his corpus is lower than yours, it is quite obvious that he will have a tougher time maintaining his lifestyle using the smaller corpus. This, especially given that he has had a high lifestyle almost all his life. You, on other hand, will be able to comfortably use the bigger retirement corpus for maintaining the relatively modest lifestyle you have always had.
So, the next time you feel low about earning lesser than your friends, make sure that you put every effort to save and invest much more than what they are doing currently. More importantly, ensure that when you do move to a job or pay scale that matches your friends, you up your savings rate as well proportionately. That way, you will be on your way to a successful retirement.
The views mentioned in the article are personal.
Get FundsIndia’s articles delivered straight to your inbox!
Enter your email address to get:
- Mutual fund recommendations from experts
- Buy, hold or sell calls for stocks
- Investment tips and tricks
- All the latest news from Fundsindia.com