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.
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. ADV/2/12-13/5726.