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Aditya Birla Sun Life Insurance Company Limited

How much money will I need for my retirement?

How much money will I need for my retirement?

Can't figure out how much will be enough to lead a comfortable retired life? Here's a simple three-step method to calculate it.

Managing your finances in your sunset years is quite a challenge. After all, your income will stop, but expenses will continue as usual. However, by planning for your retirement period, you can maintain the same lifestyle that you are leading today.

ULIP plans help investors create a sound wealth corpus for the future. Also, the policy holder may choose the shares he or she wishes to invest in. This helps the policy holder exercise control over how much the eventual earning on the unit will be.

One of the most confusing aspects investors face while planning for retirement is how much will be enough for retired life.

However, there is an easy three-step method that can make the calculation much easier.

Step 1: Estimate your current needs

The first step in calculating your retirement corpus is finding out how much money you require currently. Consider for example that your family earns Rs 4 lakh annually and you save around Rs 1 lakh. This means that you need about Rs 3 lakh annually to meet your expenses.

Step 2: Adjust for inflation

After you derive the amount you require per annum, you need to calculate how many years you have to accumulate your retirement corpus. Suppose you are currently 35 years old and you plan to retire at 65. You will hence need financial support from the age of 65, which is 30 years from today.

Further, let us assume an average inflation rate of 8 percent for the next 30 years. The inflation adjusted amount can be calculated by using the following formula:

Today's value * ((1 + inflation rate) ^ number of years left to retire)

We now substitute our estimated figures in the above formula:

Rs 3,00,000 * ((1 + 0.08) ^ 30)

Rs 3,00,000 * (1.08) ^ 30

= Rs 30,00,000 (figure rounded up)

This means that 30 years from now, you will require about Rs 30,00,000 every year to maintain the same lifestyle.

Step 3: Determine approximate life expectancy

For calculating your retirement amount, let us assume that you will live till the age of 85. This means you need to plan for 20 years.

Now, in the earlier step, we calculated that you would require Rs 30,00,000 each year. So for 20 years, you will have to multiply this amount by 20.

Rs 30,00,000 * 20 years

= Rs 6,00,00,000

Keeping in mind that your current expenses add up to Rs 3 lakh per annum, the approximate amount you will require after you retire is Rs 6,00,00,000.

You can substitute the values in the above example with your yearly expenses to derive the amount you will need for your retirement years.

Disclaimer:This is generic information and it does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any investment strategy. You are advised to make your own independent judgment with respect to any matter contained herein.

  • The policy holder pays the premium amount.

  • The premium amount is split into two parts. One part pays the premium, while the other part is invested in the securities or debt markets. This investment is handled by the insurance provider. Hence, the potential for gains on the ULIP stem from the market-linked returns accrued on the investment. One invests in the ULIP to gain valuable exposure to the equity, debt or money markets. It has a lock-in period of three years, after which the policy holder may continue investing in it or partially or fully withdraw the ULIP. ULIPs are quite liquid and offer the benefit of tax deductions on returns.

But do note that this is not a short term investment, and it is to be monitored for a long period of time to get gains.

Advantages of ULIP

At an estimate, one may earn as much 10 times the amount invested in the ULIP when measured over a long term. ULIPs help one realise their financial goals in a systematic manner.

The most important benefit of an ULIP is that the policy holder may choose the shares he wishes to invest his money in if he is not satisfied with the allotted units of the shares. This way, the policy holder may directly influence the growth and outcome of the ULIP.

The types of ULIP plans

Another ULIP benefit is that you can select the type of ULIP you want based on your long term goals. There are four types of ULIPs:

  • Wealth creation or growth

  • Children's future education

  • Health plan

  • Retirement plan

You can invest in any of these as per your requirement and risk appetite.

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