Learn How to Calculate Your Retirement Corpus
Retirement planning is one financial aspect that we often tend to miss out on while planning our finances. The Indian population often thinks of relying on their children and future generations as a means to a comfortable retirement.
However, if you do not plan your finances well beforehand, there can be difficulties post-retirement when you might not have a regular source of income. Therefore, you need to start planning for your future while you are young and working, which will bear fruits when you will not be earning any more.
First, you have to calculate how much money you will need during your retirement and work towards that goal accordingly. Now estimating a number figure for such a far-fetched future might seem like one hectic task. Well, this article is here to guide you on how to calculate your retirement corpus.
Assessment of Superannuation Corpus:
- Figure out how many years are left till your retirement
Before you start calculating your retirement corpus, it is important to figure out how many years are left until your retirement. This timeline will significantly influence your investment decisions. Also, decide if you are going to retire early or in your 60s. Based on this, you have to choose your investment avenue and invest accordingly.
- Evaluate your post-retirement budget
Your post-retirement budget should mostly reflect your current lifestyle, if you wish to stay consistent with your expenses even after retiring. Please note that during your old age, you will incur higher medical expenses. Hence, it is always wise to stay prepared for any unexpected events. Also, you might plan to spend your golden years differently by pursuing your hobby, travelling, or moving to a new place, all of which might require you to incur higher expenses.
Hence, to calculate your retirement corpus, it is ideal to calculate your regular expenses and multiply it by the number of years in post-retirement life.
- Decide your investment options and corresponding returns
Once you have figured out your retirement corpus, choose your investment avenues wisely. Make sure to diversify your funds into different investment avenues to mitigate associated risks.
Today, although there is no scarcity of investment vehicles in the market, you still need to choose yours considering some personal aspects such as your risk appetite, financial goals, etc. You should also research thoroughly around your investment options by analysing their past performance. Some attractive investment options can be NPS (National Pension Scheme), mutual funds, PPF and equity stocks depending upon your risk appetite.
- Take inflation into consideration
Inflation means costs of goods and services go up and purchasing power of your savings is lost as the time passes. Inflation can affect your standard of living and is especially problematic for retirees who may find they haven’t saved enough to support their lifestyle when prices increase. Hence it’s important to factor in Inflation, when calculating your Retirement corpus.
- Evaluate inflation-adjusted returns (pre & post retirement)
Inflation will make the value of your investment returns drop significantly over time. Here is an illustration for ease of understanding:
Suppose you have invested in a plan with an expected interest rate of return of 12% and an expected inflation rate is at 6%. So, the inflation-adjusted return will be:
[(1 + expected investment rate of return) / (1 + expected inflation rate) – 1] X 100 = [ ( 1 + 12%) / (1 + 6 %) – 1 ] X 100 = [ ( 1 + 0.12)/ (1 + 0.06) – 1 ] X 100 = 5.66% ]
As you can see, the inflation-adjusted rate of return is lower than the expected rate of return. Hence, it is ideal to calculate your returns after taking inflation into consideration.
- Calculate your retirement corpus
Now that you have understood important factors to take into account, you can calculate the retirement corpus in two ways – you can either use an online calculator or calculate it manually.
Use below steps to calculate your retirement corpus:
- Calculation of years to retirement: Retirement Age – Current Age = 60 – 35 = 25 years
- Now, let’s say your current monthly expenses are Rs. 9,00,000; you can calculate yearly expenses at the retirement age at constant inflation rate of 7% using Future Value formula in excel, the same would come out to be Rs. 48,84,689
- Calculation of inflation adjusted return: ((1+RoI)/(1+Inflation Rate))*100
Post-Retirement Inflation Adjusted Return = ((1+8%)/ (1+7%)) *100 = 0.93%
- Calculate Post Retirement Life in Years = Life Expectancy – Retirement Age = 90 – 60 = 30 years
- Calculation of Retirement Corpus: You can calculate yearly expenses using ‘PV (Present Value)’ function (assuming payment made each year to be Rs. 48,84,689; at the rate of inflation adjusted return of 0.93%, over post retirement years of 30 years.) Retirement corpus required will be Rs. 12,73,61,182.
Importance of Calculating Your Retirement Corpus
You might wonder why it is important to go through such complex calculations or why someone should plan for retirement so early in life. Well, here are some reasons why you should keep yourself prepared and one step ahead by calculating your retirement corpus in advance:
- Worriless lifestyle: After working hard throughout your life, you expect to enjoy a decent and stress-free life post-retirement. That is why you need to figure it all out before you reach your retirement, as you won’t have any regular source of income once you reach that stage. Of course, you may want to pursue a new career, take on a hobby or travel, but all this won’t be that easy without having a stable source of cash flow. Also, there are always chances of facing unpredictable emergencies.
- Shield from inflation: The cost of living as it was a decade ago is not the same now, and it is increasing even more rapidly now. Therefore, if you do not plan your investments properly to shield your post-retirement savings from the grasp of inflation, your savings might not be sufficient during your old age.
- Security: Any sort of retirement planning should be done while keeping in mind the financial security of yourself and your dependents. Any emergency, unfortunate incidents, higher education plans for children, or medical expenses for a spouse or any family member will require heavy funding. So, it is important to build sufficient retirement corpus to take care of expenses.
By going through this article, you might have understood why it is important to plan your retirement in advance and how to estimate retirement corpus. If you want to have a relaxed stress-free retired life, try to implement these strategies and start investing as early as possible.
Frequently Asked Questions
What are the best investment options for retirement planning for self-employed individuals?
There are various other avenues for investment which are suitable for investment, such as mutual funds, commodities, fixed deposits, annuity plans, PPF etc. Also, as you are self-employed, you can make lump-sum investments for building your retirement corpus. The government is planning to open up its key social security scheme — the Employees’ Provident Fund to self-employed individuals.
When should I start my retirement planning?
The answer to your question is – ‘as soon as possible’. Most financial advisors suggest that you start planning for your retirement in your 20s. This gives your investment more time to reap the benefits of compounding. Also, some investment plans, such as life insurance, give you the benefit of lower premiums for higher benefits when you are young.
Should I withdraw pension as a lump sum or as an annuity plan?
This choice is entirely personal and varies from individual to individual. You should carefully assess the rate of returns of your retirement plans to make this decision. Usually, people prefer to withdraw it as an annuity as it ensures a stable income for the rest of your life. But it completely depends on your pre and post-retirement planning.