How much should I invest/save for retirement? is a pretty common question (try googling it). This question, like most other, is often asked with the expectation of a nice and comfortable answer. Be sure to save 10-15% of what you make, for retirement is an equally common answer. Unfortunately, nice and comforting as it may sound, such answers are often far from the truth.

Retirement planning is complicated because the corpus accumulated is not meant to be spent in one-shot like all other goals. The corpus must not only provide regular income to meet expenses, it must also grow at a rate that at least matchesinflation and must be large enough to outlive the individual. This is a tough ask. Any retirement calculation is subject to several assumptions. If these assumptions are not realistic (for example planning with inflation of 6% and equity return of 15%) then results of the calculation would appear comforting even as reality prepares a bitter pill.

Many people criticize retirement calculators as a academic exercise due to the assumptions involved.Many others think that such calculators are bogus since they output a large monthly investment required for building the retirement corpus. What they fail to understand is that the aim of a retirement calculator is to make people take stock of their money habits.

If the calculator says you need to invest Rs. 30,000 a month to fund your retirement and you can only afford Rs. 15,000, what do you do? Do you say the result is nonsense, invest Rs. 15,000 and do nothing more?Do you adjust the parameters in the calculator (decrease inflation, increase returns before and afterretirement and increase rate at which investments increase each year) until the result is close to Rs. 15,000? Such an attitude is idiotic and suicidal.

A retirement calculator provides an insight into your financial life. If the calculator says you need to invest much more than you can, then the trouble could be (assuming retirement is at least a couple of decades away and other inputs are reasonable: 8-10% inflation, 10-12% equity returns etc.) with your lifestyle. You need to take a good hard look at your expenses and make two lists. One for necessary expenses (food, water, electricity etc.) and one for unnecessary ones. Get rid or reduce the frequency of the unnecessary expenses and be sure to invest the amount saved for your retirement. The primary goal of any retirement calculator is to make you do this exercise.

Getting rid of frequent unnecessary expenses and embracing a frugal lifestyle is the most important step towards financial peace and security. Everything else, investing in the right instruments, seeking returns etc. is a distant second.

If you insist on a thumb rule for retirement savings. then here is a reasonably fool proof one: Reduce expenses as much as you can, invest as much as you can, as early as you can. Your investment should roughly match your expenses (meaning they should increase at least the rate of inflation!) Even if retirement calculators indicate you need to invest less, I strongly suggest you try and invest as much as you possibly can.

Why? If you follow this thumb rule religiously then you naturally tend to keep expenses down. More importantly, adhering to the rule gives you a satisfaction that you have done your best with regard to optimizing the amount you need. That leaves only asset allocation, diversification and rebalancing to worry about!

Do I practice what I preach? Yes. Each month I invest approximately 120% (or more) of my monthly expenses for retirement. The investment is done before I withdraw money for expenses. This is possible not because I earn a lot (that is relative. In any case an academic earns enough, but never a lot!) but because we (me and my wife) have a frugal lifestyle .

Most people dismiss this saying this is impressive but impractical. Yes I agree that in some cases reducing expenses beyond a point or investing as much as you spend is not possible. However, I am convinced that in a majority of cases it boils down to reducing unnecessary expenses. All one requires is some common sense, a sense of contentment and understand what true happiness is.

Most people misunderstand this attitude. They think this means curbing habits and not enjoying life and counter argue: Life is short, let me enjoy NOW! etc. I completely agree. We should enjoy life and pamper ourselves from time to time. Not every month. A frugal lifestyle is one in which you prioritize expenses and have fun now and then after all higher priorities are accounted for. That is neither unreasonable nor impossible. It is like most things associated with personal finance, simple commonsense.

Here is a retirement calculator that gives the monthly investment needed as a percentage of your current monthly expenses. Hopefully it might help provide an insight into your money habits. Safe to that the investment required will be much more than 10-15% of your take-home pay, since your expenses are likely to be much more than that!

Note: the math involved is the same as a standard retirement calculator.

Related Resources: I have a set of retirement calculators for investors of all ages.

Note: This post originally appeared in freefincal on July 15. When I moved the blog, I lost this post and was unable to recover it. So I have re-posted the article. The re-post also allows me to check if email subscribers to the blog have been transferred correctly