70’s formula plays a big role in retirement planning: Those who ignore have to repent later; Understand exact calculation and fund size

Most working people save and invest during their active employment, but are unable to accurately estimate their actual financial needs after retirement. The Formula of 70 represents two separate but interrelated basic rules in personal finance:

1. ‘Rule of 70’ (Rule of inflation and purchasing power): It tells in how many years the purchasing power of your money will be halved at the current inflation rate.

2. 70% Income Replacement Ratio: According to financial theorists, to maintain an active lifestyle after retirement, a person needs to have at least his pre-retirement last in-hand salary. 70% monthly budget Is required.

Any retirement investment made without understanding these two rules together can lead to serious fund shortage in future.

The ‘Rule of 72’ in compound interest measures the time it takes for money to double, while the ‘Rule of 70’ in macroeconomics is used to measure the effect of inflation:

$$\text{Time for the value of money to be halved (years)} = \frac{70}{\text{Annual average inflation rate (\%)}}$$

• At an average inflation of 6%: $\frac{70}{6} \approx 11.6$ years. This means that the goods which are available for ₹ 1,00,000 today will require ₹ 2,00,000 after 11-12 years.

• At an average inflation of 7%: $\frac{70}{7} = 10$ years. In just 10 years your current purchasing power will be reduced to half.

If a person is planning to retire at 60 at the age of 35, the value of his expenses would have increased by more than 2.5 times in a span of 25 years. Those who ignore this often get into financial trouble 5-10 years after retirement.

Many people feel that after retirement, they will be able to manage with only 30-40% of their money as expenses for commuting to office, EMIs and children’s education will be over. The reality is the opposite:

• Health and Medical Expenses (Healthcare Inflation): In old age, the cost of routine medicines, health checkups and emergency hospitalization increases at almost double the normal inflation (10-12%).

• Lifestyle and Social Commitments: As free time increases, expenses for travel, social gatherings and household maintenance increase.

So, if your final monthly take-home income at age 58-60 is ₹1,00,000 If so, the first year’s pension/cashflow is at least ₹70,000 per month There should be, and there should also be an annual growth of 6% every year.

The mathematics of the corpus required to ensure a cashflow of ₹70,000 per month (equivalent to present value) at age 60 for a 30-35 year old working person can be understood as:

• Current Monthly Expenses: ₹50,000

• Required monthly expenses after 25 years (at 6% inflation): Approximately ₹2,15,000 per month

• Initial post-retirement pension required under 70% formula: ₹1,50,000 per month

• Total corpus for a secured life of 25-30 years: About ₹4.5 crore to ₹5.5 crore