Are you ready to take control of your financial future?
Ramalingam Kalirajan offers a step-by-step guide to calculate exactly how much money you will need when you enter your golden years.
Calculating your retirement corpus doesn't have to be a complex task requiring elaborate spreadsheets or financial calculators. You can easily determine this crucial figure using just the calculator app on your mobile phone.
Before diving into the calculations, there are four essential pieces of information you'll need to gather:
- Your Monthly Expenses: What do you spend each month? For example, say, Rs 50,000.
- Your Current Age: How old are you right now? Let's say you are 36 years old.
- Your Retirement Age: At what age do you plan to retire? Perhaps at 60 years.
- Your Life Expectancy: How long do you expect to live? While this is an estimate, consider 85 years as a reasonable minimum for your calculations.
Armed with these details, you can quickly and accurately calculate the retirement corpus needed to maintain your lifestyle post-retirement.
Ready to give it a try? Let's dive in!
1. How to Calculate Your Retirement Corpus
Getting Started with Simple Math
Let's break down the math step-by-step to calculate your retirement corpus:
Step 1: Determine the Time Till Retirement
First, calculate the difference between your current age and your planned retirement age. For example, if you're currently 36 and plan to retire at 60, that's 24 years to go (60 -- 36 = 24 years).
Step 2: Account for Inflation
Remember, your expenses will increase over time due to inflation.
At a 6 per cent inflation rate, your expenses will double approximately every 12 years. Therefore, in 24 years, your expenses will quadruple.
For instance, if your current monthly expenses are Rs 50,000, they will increase to Rs 2 lakh per month by the time you retire (50,000 * 4 = 2,00,000).
Step 3: Calculate Post-Retirement Duration
Next, find the difference between your life expectancy and your retirement age. If you expect to live until 85, that's 25 years of retirement (85 – 60 = 25 years).
Step 4: Annual Expenses in Retirement
Multiply your monthly expenses at retirement (Rs 2 lakh) by 12 to get your annual expenses. So, Rs 2 lakh per month equals Rs 24 lakh per year (2,00,000 * 12 = 24,00,000).
Step 5: Total Retirement Corpus
Now, multiply your annual expenses by the number of years you expect to live in retirement. For 25 years, that's Rs 24 lakh per year multiplied by 25 years, which totals Rs 6 crore (24,00,000 * 25 = 6,00,00,000).
Assuming 6 per cent inflation rate and 6 per cent returns, your retirement corpus would be Rs 6 crore. This might seem like a lot, but it ensures you maintain your lifestyle throughout retirement.
Additional Considerations for a Younger Spouse
If your spouse is younger than you, you'll need to account for their additional years of expenses.
For example, if your spouse is 3 years younger, you'll need to cover an extra 3 years of expenses. Using the same Rs 24 lakh per year, you'll need an additional Rs 72 lakh (24,00,000 * 3 = 72,00,000).
Adding this to your previous corpus, the total retirement corpus required would be Rs 6.72 crore.
Considering Higher Returns Than Inflation
What happens if your assumed returns exceed inflation after retirement? Let's explore how this impacts your retirement corpus.
Adjusting for Higher Returns
If your returns are higher than inflation, you won't need as large a corpus. Here's how you can adjust:
1 per cent Higher Returns: If your returns are 1 per cent higher than inflation (e.g., inflation at 6 per cent and returns at 7 per cent), multiply your required corpus by 0.9. So, instead of Rs 6 crore, you'd need Rs 5.4 crore (6 crore * 0.9 = 5.4 crore).
2 per cent Higher Returns: If your returns are 2 per cent higher than inflation (e.g., inflation at 6 per cent and returns at 8 per cent), multiply your corpus by 0.8. This reduces your requirement to Rs 4.8 crore (6 crore * 0.8 = 4.8 crore).
3 per cent Higher Returns: With returns 3 per cent higher than inflation (e.g., inflation at 6 per cent and returns at 9 per cent), you need to multiply your corpus by 0.7. Thus, you'd require Rs 4.2 crore (6 crore * 0.7 = 4.2 crore).
A Conservative Approach
While these adjustments can significantly reduce your required corpus, it's prudent to be conservative in your estimates.
My suggestion: Don't assume more than a 1 per cent return above inflation to ensure you're on the safer side of calculations.
By planning with these adjustments in mind, you can confidently prepare for a secure and comfortable retirement, even if your returns slightly outperform inflation.
Ready to start planning your financial future with this in mind? It's always better to be prepared!
Handling Non-Divisible Age Differences
What if the difference between your current age and your retirement age isn't divisible by 12? This scenario is common, but there's a straightforward solution.
Using Fractions for Precision
When your current age and retirement age difference isn't a neat multiple of 12, you can use fractions to get accurate results. For example, let's say you're currently 38 years old and your monthly expenses are Rs 50,000.
Doubling Expenses with Inflation
With a 6 per cent inflation rate, your expenses will double every 12 years. So, by the time you reach 50, your expenses will increase to Rs 1 lakh per month. Now, to find your expenses at age 60, use the fraction method:
Difference Calculation: The difference between 60 and 50 is 10 years.
Fractional Adjustment: Multiply Rs 1 lakh (your expenses at 50) by 10 (the difference in years) and then divide by 12.
The calculation looks like this: (1,00,000×10)/12 = 83,333.
The initial expenses of Rs 1 lakh at age 50 are added to the calculated increase of Rs 83333, giving a total estimated expense of Rs 1.83 lakh at age 60.
Final Monthly Expenses
So, your average monthly expenses at the time of retirement would be approximately Rs 1.83 lakh.
By using fractions, you can ensure your retirement planning remains precise, even if your age difference isn't a perfect multiple of 12.
Now, are you ready to fine-tune your retirement corpus calculations with this approach? It's easier than you might think!
Considering a Different Inflation Rate
What if you want to use a different inflation rate for your retirement planning? Let's explore how to adjust your calculations accordingly.
Using the Rule of 72
To determine how long it will take for your expenses to double with a different inflation rate, you can use the Rule of 72. This simple formula helps you estimate the doubling time for your expenses or investments:
Doubling Time = 72/Inflation Rate
For instance, with an inflation rate of 6 per cent, your expenses double every 12 years (72 ÷ 6 = 12).
If the inflation rate is 4 per cent, expenses double every 18 years (72 ÷ 4 = 18).
Adjusting for Different Inflation Rates
Let's see how different inflation rates impact your calculations:
Inflation Rate at 4 per cent: If your current monthly expenses are Rs 50,000, they will double to Rs 1 lakh in 18 years.
Inflation Rate at 5 per cent: Using the Rule of 72, your expenses will double in 14.4 years (72 ÷ 5 = 14.4).
Verifying Your Calculations
To validate your calculations, use a trusted calculator to ensure accuracy. This helps you confirm that your estimates are correct and gives you peace of mind.
Ignoring Taxes for Simplicity
To keep things simple, these calculations do not consider taxes. Including taxes would complicate and lengthen the calculations. However, if you want a more precise estimate, you can account for taxes by adjusting your corpus.
For instance, if you fall into a 10 per cent tax bracket, multiply your corpus by 1.1 to factor in taxes.
Additional Considerations
Other expenses, such as health insurance and car insurance premiums, are not included in these calculations. These can be easily calculated separately and added to your total expenses.
By considering different inflation rates and adjusting for taxes and other expenses, you can create a more accurate and personalised retirement plan.
Now, are you ready to refine your retirement corpus calculations with these adjustments? It's straightforward and ensures you're well-prepared for the future!
Conclusion
Calculating your retirement corpus doesn't have to be daunting. With a few simple steps and some basic math, you can estimate the amount you'll need to maintain your lifestyle after you stop working.
By considering factors such as inflation, investment returns, and additional expenses, you can create a comprehensive and realistic retirement plan.
Remember, it's always better to be conservative in your estimates and to account for unforeseen expenses. Regularly reviewing and adjusting your retirement plan ensures you stay on track to meet your financial goals.
Are you ready to take control of your financial future?
Start today by gathering your financial information and using these methods to calculate your retirement corpus. With careful planning and regular adjustments, you can look forward to a secure and comfortable retirement. Happy planning!
- You can ask rediffGURU Ramalingam Kalirajan your questions HERE.
Ramalingam K, an MBA in Finance, is a Certified Financial Planner. He is the Director and Chief Financial Planner at holisticinvestment, a leading financial planning and wealth management company
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
