Starting salaries in Pakistan are notoriously low. The recent ‘my first salary’ trend on Twitter, where users shared their starting salary, was illuminating in Pakistan, if only to demonstrate just how low the standards are.
There is significant literature on why salaries are depressed in Pakistan: it has to do with joint family systems, low home ownership, and criminal underpayment in certain fields. But we at Elphinstone are not interested in examining the root causes, for now: we are interested in making sure that Pakistanis are able to play the system, and be able to retire comfortably – sorry, even rich – on a middle class income. We do not think this is out of the realm of possibility. It just requires some strategic savings, and a basic understanding of how inflation works.
The first thing we try to do is calculate how much income you will need in retirement, which is a function not just of your current income, but also of your starting salary at the beginning of your career (which gives us an estimate of your income growth trajectory), and – as with everything in financial planning – inflation.
In our model, we ask you to input two figures: your monthly salary right now, and your monthly salary when you started, excluding the salary you may have earned during your probationary or training period. We do this because those salaries are artificially depressed, and your first salary as a full-time employee represents your real starting salary.
The model first calculates your income growth rate from the difference between when you started, and your income now. Our model also features some set parameters: for instance, the inflation adjusted capita income growth is set at 5% (historical average since 1960), while inflation is set at 7.6%, which is the historical average in Pakistan since 1958.
It seeks to estimate your income using a combination of your own income trajectory in your career thus far, coupled with estimates of lifetime income trajectories across the economy as a whole. It then estimates your inflation-adjusted monthly income immediately prior to retirement, and assumes that this is the amount you will need to continue into retirement.
Why does the model assume this? Because everyone thinks expenses will go down in retirement, but they rarely do. Your daily expenses might go down, but you may want to travel more, or your healthcare expenses might increase. Either way, there is no sense in planning for a decrease in your monthly expenses because it is not realistic.
Once we calculate how much you need per month, we multiply that amount to arrive at how much you will need per year. We calculate both the inflation-adjusted and the inflation-unadjusted amounts for this number.
The next part is tricky. We need to figure out how much you will need in assets that will allow you to have that income that you will need in retirement. Again, we will calculate this both in inflation-adjusted and inflation-unadjusted terms.
The formula for this is complex, but what we can tell you is that the total amount you need to save up for comes out to approximately 25 times your annual income needs. This amount will expect to last you comfortably through a 25-30 year retirement, meaning if you decide to retire at the age of 65, you will likely have money to last you through well into your mid-90s.
Once we calculate how much you need to save in total assets, we then calculate how much you need to save per month – assuming you are able to increase your savings amounts by inflation every year – in order to be able to save up that amount in assets, assuming that future returns on Pakistani stocks are approximately similar to what they have been historically.
We should caveat, of course, that past results are no guarantee of future returns, and that future returns may be lower than in the past. Our model does not definitively guarantee that our clients will be able to meet 100% of their retirement savings needs by saving as much as the recommended amount, but we offer the number as a guideline on how much an individual may need to save in order to ensure some measure of financial security in their retirement years.
One note about inflation: we calculate both absolute and inflation-adjusted amounts, but only display inflation-adjusted numbers to you for the retirement calculation. Why? Because the unadjusted numbers would make no sense to you. Inflation in Pakistan is so high that those numbers would be astronomically large, but also would not tell you about your purchasing power.
In order to solve that problem, we display only inflation-adjusted projections, so that you can understand – in today’s terms – how much money you will have in monthly retirement income and compare it to your existing lifestyle.