Why retirement planning is necessary? Retirement is a phase of life where one has left the job and is no longer working. This eventually leads to stoppage of regular income in form of paycheck etc.
People generally retire from job at 60 years of age. This is an age where the person may not be physically as able as before. Hence at this phase of life if a person can rest, and still generate regular income, it will be ideal.
How this will happen? Generation of regular income without working for it, is the goal of retirement planning.
The first step of retirement planning is to access a reliable retirement planning calculator. This calculator will not only ask important questions, but will also give critical answers.
A good retirement calculator guides one to the right set of answers related to retirement corpus building.
Retirement Planning Calculator
|Current Age (in years)|
|Retirement Age (in years)|
|Life Expectancy (in years)|
|Current Monthly Expense (Rs.)|
|Current Retirement Fund-CRF(Rs.)|
|Expected Growth of CRF (Rs.)|
|Average Inflation Till Life Time (%)|
|Expected ROI Till Retirement (%)|
|Expected ROI After Retirement (%)|
|Total Retirement Fund Required-TRF (Rs.Lakhs)|
|Additional Retirement Fund-ARF (Rs.Lakhs)|
|Monthly Investment Required (Rs.)|
The above retirement planning calculator will give the following three critical answers:
- Total Retirement Fund Required (TRF): Based on the present expenses, the calculator will forecast future expense (after retirement). Based on this forecast and ROI levels, the calculator will estimate the total retirement fund required. The size of this retirement fund will be enough to manage retirement expenses. Know more about manual estimation of retirement corpus.
- Addition Retirement Fund to Build (ARF): Suppose ones needs to build a retirement corpus of say Rs.2.0 Crore (TRF). Based on his current retirement portfolio, Rs.80 Lakhs will be built automatically. It means, the person needs to build only an additional Rs.1.2 Crore (ARF). Read more about NPS vs EPF for retirement corpus building.
- Monthly Investment Required (MIR): This is the main To-Do for the user of this calculator. This is the amount which one must invest each month to build a corpus as big as ARF. Read more about types of mutual funds and their potential returns to understand where to invest – to build ARF.
The logic based on which the above retirement planning calculator works will be explained below. Why it is essential to know? Because it will build a thought process which eventually benefits the planner.
An informed planner can build a substantially bigger retirement corpus than a casual investor.
How to Plan for retirement?
[TRF: Total Retirement Fund Required, ARF: Additional Retirement Fund To Build.]
The above flow chart summarises how one can plan for retirement. This flow chart is more useful for people who wants to know the thought process that must go behind retirement planning.
Here we will see in a Q&A format, how the above flow chart answers important questions related to retirement planning. It is the answering of these questions which eventually gives us the following three results:
- How much retirement fund is required (TRF)?
- How much is already taken care?
- How much to be built additionally (ARF)?
- How much to invest each month to build ARF?
So let’s start with our Q&A session…
Q1. When you want to retire?
This is the first question and perhaps the most important question in retirement planning. What is its importance? Because the further away is the retirement date, easier will be to build the corpus. How it will be easy? When goal is far, even smaller monthly investments can build a bigger corpus. Try using the above calculator to understand better. Read more about how to retire early from job.
Q2. How long the retirement corpus must last?
This question is related to life expectancy. How does it make the difference? People who are expected to live longer after retirement, will need a bigger retirement corpus. In order to build a bigger corpus, more money needs to invested each month. This results in more financial-load for the investor.
Q3. How much will be your expense after retirement?
This is perhaps the most difficult question to answer. But it is necessary to answer this question accurately. People often overestimate or underestimate this requirement. Hence my calculator, estimates the minimum future expense requirement based on a rule of thumb. As a rule of thumb, a person’s retirement expense will be approximately 30%-40% of current expense. Read more about how to calculate daily expense for self.
Q4. What is the size of your current retirement portfolio?
For majority working class people, retirement fund is locked either in EPF, PPF or other debt based plans. What one must do to answer this question is to check the current balance in these accounts, and enter the value in the calculator. As per current trends, we can estimate that our savings parked in EPF, PPF etc will fetch close to 7-8% returns in times to come. Read more about the withdrawal process of EPF savings.
Q5. How fast your expense’ll grow over time?
People tend to spend more in proportion to their growth of income. Over long period of time, ones income growth will match at least the rate of inflation. Considering India as a growing economy, assumed inflation rate of 6% p.a. for next coming years is a safe assumption. Understand inflation using Dosa Economics of Raghuram Rajan (our former RBI governor).
Q6. Where to invest to build retirement corpus?
This is also a very crucial decision to be made in the process of retirement planning. The advantage one often gets in retirement planning is that, this goal is very far. The further away is the goal from today, one can take the liberty of ‘equity based investing’. Personally I would like to use SIP in multi cap funds to build my retirement corpus. Read more about use of step-up SIP for long term investment goals.
Q7. Where to invest the retirement corpus for income generation (after retirement)?
This is where a lot of people tend to make mistake. What is the mistake? They either invest their retirement fund too conservatively, or they go too aggressive. Both extremes must be avoided. In the process of investment of retirement corpus, one must focus on ‘regular income generation‘. Once the focus is right, the next attention-point must be on ‘yield’ and ‘diversification’. Read more about where to invest retirement money.
Q8. How big should be the retirement corpus (TRF)?
This is the answer which is most important. How? Suppose you are 32 years of age, and you want to retire at 60. Answering this question means, you are telling how much money you must have as ‘retirement savings’ when you are 60 years of age. The above retirement planning calculator has been designed to give you this answer. Go ahead and use it. Learn to estimate how much money you need to retire from job.
Q9. How much you must invest each month till retirement (MIR)?
This is the main TO-DO you will get from using the above calculator. Answering this question will tell, how much money one must invest each month to build the needful retirement corpus (ARF). Read more about how to invest risk free and earn high returns.
Retirement planning is an essential priority of personal finance management. In fact it will not be wrong to say that retirement planning should be the number one priority of all. Why? Because financial stability at old age is a necessity.
How to plan for retirement? I use my retirement planning calculator to figure out ‘how big should be my corpus‘, and ‘how much should I be investing‘ as on date to reach the goal.
This is a simple tool, but a very effective related to retirement planning.
If you like, I will request you to share your opinion in the comment section below.
Have a happy investing.