I have highlighted in the past that I love mentoring young professionals because I end up learning a lot from them. So here is another question that came up during my conversation over the weekend.
“Vignesh – can you let me know on average how much should I be increasing my salary every year?”
I definitely was not expecting a question as specific as this in a mentoring session on career development 🙂 … But I did not want to shy away from taking a stab at this question and went back to my early career days when my friend and I were discussing this topic. We were fresh out of college and were preparing for our higher studies and used to spend a lot of time playing with data and trying to get insights. At that time, we had come to this magic formula that – “we should be doubling our salary every 5 years”
I told my mentee that this formula has helped me stay ahead of the game and promised that I will come back with a more detailed analysis. So here are some quick numbers based on a few assumptions that can help understand this magic formula in detail.
- Initial starting salary (After Tax): 3.5 Lakhs per annum – INR
- Inflation (avg) – 9%
- Every 5 years expenses increase by 25% – factoring in milestones like (higher education, marriage, purchasing assets, increase in family size, medical expenses, etc.)
- 35 years as an earning member
- Expenses are 60% of what you are earning (You can play around with this)
With these assumptions, I went and started playing around with the % of hike that one would need to end up with a corpus that one can lead a good life.
Following are the results (note: I have calculated the PV of future savings to give you an idea of what the savings corpus will look like)
- At around 15% Post tax salary increase, you will end up with a savings corpus of INR 1.96CR
- If you are smart and are able to invest in instruments (post-retirement) with 10% annual average returns, you will have a monthly payout of INR 1.63L
- With the Present value calculation – you can imagine how your future retirement life would look like as of today. I bet living with a 1.63L retirement cashflow every month does not look bad at all.
To cut short the long story – at around 15% annual salary growth, you end up multiplying your salary every 5 years.
I am glad that we got the “Magic formula” correct couple of decades back.