3 Steps to Calculate Retirement savings you need

If you are currently engaged in a professional career, you have thought about saving for your retirement. But the first question that arises is how much you need to save. If there were an answer to this question, it would be easier for us all to understand the importance of saving and making an investment in ourselves. We could also be more motivated in our financial growth, knowing that we will have the means to finance ourselves when we grow old.

But unfortunately, there isn't an easy answer to this question because no one can tell us with certainty the amount of money we need to save to secure our life and comfort on our own or with our future families.

However, you can get an estimated answer to this question by calculating 3 easy steps. Even though the answer won’t be 100% true, it can surely guide you to the amount you have to save before retirement.

What exactly is Retirement Planning?

Planning for retirement is prepping for your future lifestyle now so that you may continue to fulfil all of your goals and objectives on your own. Defining your retirement objectives, predicting how much funds you will require, and participating in increasing your retirement savings are all part of this process.
Every retirement plan is unique. After all, every individual can have quite specific strategies for how they'd like to enjoy their retirement years. This is precisely why it is critical to get a strategy that is tailored to your personal requirements.

Why is retirement savings necessary?

Retirement Savings is necessary for the following reasons:
1. Lifestyle maintenance:
You have a certain quality of lifestyle that you maintain right now. Your main objective should be to maintain that lifestyle throughout your lifetime or even upgrade it. Today, you have a steady flow of income to supplement your lifestyle. Following your retirement, you need to have financial support in order to maintain your quality of life. This is achievable through timely retirement planning.
2. Being emergency-ready:
Emergency situations can arise at any given moment. At that point, you need to have financial assistance in order to face that issue. Following retirement, medical issues can deplete a major portion of your savings. With the right retirement strategy, you may save for unforeseen situations by establishing a rainy-day fund.
3. Fighting inflation:
Inflation is a common enemy of every saving and investment instrument. The decreasing purchasing power of money can highly affect your living standard. Planning for retirement needs to take inflation into account as well as provide an efficient solution that beats it.
4. Fulfilling Lifetime Goals
Your retirement will be like a fresh start to your life. It's that wonderful period in life when you have the leisure to accomplish ambitions such as travelling to new locations, taking up a new interest, or even establishing your own business. You might also have ongoing obligations, such as sending your kid overseas for further education. All of your aspirations may be realised with the correct retirement strategy.
5. Leaving a Legacy
You've worked hard to provide a comfortable life for your household. As a result, you would want to make sure that this pleasure lasts for decades to come, even if you are not present for them. When you prepare for retirement and accumulate retirement funds, you may also plan to provide money for your household.

How to Calculate Retirement Savings Amount?

The following is a 3-step process to calculate an estimation of your retirement savings:
Step 1: Compute Your Expenses
Your existing spending serves as a baseline for your future needs. You may achieve this by applying the equation 'Current Expenses = Current Income - Current Savings.' For instance, if your yearly earnings are INR 5 lakhs and you keep INR 1 lakhs each year, then your current expense is INR 4 annually. Now, proceed backwards and identify the costs that total INR 11 lakhs. Remove any costs that will no longer exist after you retire. This implies that all living expenses, such as groceries, utility bills, and housekeeping, as well as other expenses, such as healthcare, yearly vacation, insurance premium payments, and so on, will continue. However, costs like EMIs on ongoing loans (credits that will be paid off before your retirement) can be eliminated. So, your annual expenses in Step 1 compute to INR 4 lakhs each year.
Step 2: Add Inflation
The amount of money needed for daily costs today and after your retirement will be drastically different. This is due to inflation. This is among the most important things to consider when estimating your retirement savings amount. Let’s consider the current inflation rate of 7.00% to be true when you retire.² Let's say you are currently 40 years old, and you will retire at 60 years. This increases the number of your expenses from INR 4 lakhs annually in Step 1 to around INR 15 lakhs annually in Step 2.
Step 3: Consider Your Life Expectancy
Now, let’s compute your investment term. You need to have funds in your retirement account for as long as you live. Nobody knows how long they will live. Nevertheless, as healthcare and pharmacology advance, the overall Indian life expectancy rises. As of right now, the life expectancy of an average Indian is 70.19 years in 2022. ³ Keep that data intact. This further increases your estimated expenses from INR 15 lakhs in Step 2 at 60 years to INR 29.5 lakhs in Step 3 at 70 years of age.

The Bottom Line

Money can cause a lot of stress; it can create unnecessary anxiety and problems in our lives. With a proper financial plan, you’ll be able to sleep better at night because you know that you are covered for the future.