How To Do Retirement Planning (Part 1)
"Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese."
Gene Perret
Congratulations that you have reached this far! It shows your dedication toward your quest to be financially independent. Now that you have realized the importance of retirement planning, let's get started with how to proceed.
Step 1- Calculate Retirement Expenses
The first step to identifying your retirement expenses is to identify your present yearly expenses and adjust them for inflation by the time your retire.
For example, Let us assume you are presently 30 years old and monthly expenses that you expect when you retire will be around Rs 40,000 (this only includes daily sustenance, traveling, medical expenses, and other occasional purchases but not major expenses like your kid's education or home loan). Considering the retirement age to be 65, you have 35 years to work and save money.
Therefore, your annual expenses are 12X40,000= Rs. 4,80,000.
The average annual inflation rate in India from 1960 to 2021 is ~7.38%. Therefore, let's assume inflation to be on the higher end, i.e, 8%. Now, we need to calculate how much will your expenses be when you retire (i.e., after 35 years) factoring in inflation @ 8% p.a.
Using the method of compound interest, Rs 4,80,000 compounded annually at a rate of 8% for 35 years = Rs. 70,96,965. This will be your yearly expense 35 years from now!
Considering the average lifespan of humans due to advances in science to be 85 years, you require expenses for 20 years (85-65).
A worksheet with a template has been provided for readers to simply enter the investment returns they plan to achieve and find the amount they need to save before they retire. We need to enter the following parameters in the retirement expense calculator in order to identify our retirement expenses: Age Estimated monthly expenses post retirement Inflation % (If you do not know how much to adjust, leave it at 8% to allow for safe figures) Investment % (if you intend to invest retirement corpus in intruments like mutual funds, stocks etc.
DOWNLOAD SAMPLE WORKSHEET
When we enter the above parameters, we are presented with two values: Option I : Total retirement corpus required when saved as lumpsum amount (i.e. no investment and simply keeping the amount in back for regular withdrawal) Option II: Total retirement corpus required when saved as investment (kept invested either in mutual funds, FD, stocks etc)
A sample table showing retirement expenses calculation:
As can be seen from the image above, calculator gives us following values when we assume age to be 30 years , expected monthly expenses to be Rs. 40,000, inflation to be at 8%, investment returns at 8%(this can vary according to risk profile of the investor): Option I: Total retirement corpus required when saved as lumpsum amount = Rs. 35,78,49,722. Option II: Total retirement corpus required when saved as investment (kept invested either in mutual funds, FD, stocks etc) = Rs. 14,90,36,270.
As you can see, there in Option II you are investing approximately only 42% of the intended corpus yet reaping full benefits! It all boils down to how effectively you utilize the power of compounding interest. Users can modify these figures according to their risk profile, intended corpus target, present salary, etc, and come to different values.