How much of my income should I save every month?

Saving aims at securing financial future. Every one ponders this question time and again. However answer for this question is not straight forward as appropriate level of saving would depend on various factors, like current life style, current financial position, time to retirement, expected retirement benefits, expected post retirement life style , economic conditions, inflation, interest rate, available investment option . Thus when it comes for financial planning “one size fits all” does not work.

To keep things simple, let’s assume Mr X starts working at the age of 25 Years and retire at 60 Years and would live till 100 Years. Mr X has 35 years (“accumulation phase”) to plan for 40 years of retirement. Mr X is starting from base zero (no inheritance), does not have pension benefits from the employer and wants to be financially self-dependent post retirement. Mr X would like to spend 10% on non-essentials during accumulation and would like to reduce to 5% post retirement. Mr X perceives inflation as biggest risk for the plan

If Mr X is able to generate a return which matches inflation on its savings; then Mr X has to save 50% of his monthly Income to sustain the current lifestyle post retirement; However if Mr X wants to save less then he should be able to generate higher return, on his savings. The table below gives a ball park figure of required level of savings (as a % of income) during the accumulation phase to maintain the life style post retirement

Return on Savings	Saving	Spending (% of Income)
(%)	(% of Income)	Essential	Non Essential
Inflation Rate+0%	50%	40%	10%
Inflation Rate +1%	45%	45%	10%
Inflation Rate +2%	39%	51%	10%
Inflation Rate +3%	34%	56%	10%
Inflation Rate +4%	29%	61%	10%
Inflation Rate +5%	24%	66%	10%
Inflation Rate +6%	20%	70%	10%

*Essentials- Rent, bills, vehicle maintenance, health care, Education requirements etc

India’s context -India’s average inflation over last 30 years stood at 8.18%; Bonds/Fixed Income (post tax) would be able to generate a real return of 0-1% (“ real return is return above inflation”) thus investors who prefer investing in Bond/Fixed Income should look at saving 45-50% of their income; While diversified equity portfolio could be able to generate a real return 5-6% in the long run, which calls for a savings of close to 20-25% of income.

Conclusion: Savings should range 20-25% for risk takers (comfortable with equity/alternative investments) and 45-50% for non-risk takers (comfortable with bond). I appreciate everyone to have disciplined financial plan and tab on their savings to be financially self-sufficient post retirement