Retirement calculation: How much money will you need in your retirement? This equation will tell you

Retirement calculation is vital for successful retirement planning. To figure out how to calculate the retirement amount, you will need to account for other parameters, such as time till retirement and estimated inflation.

calculate the retirement amount

Retirement is not merely a milestone in your life but rather the beginning of a new journey. The average person can expect to have 20-25 years of life ahead after retirement, wherein expenses and lifestyle needs have to be managed without an active income stream. Retirement planning is, therefore, a crucial exercise that needs to be taken up at the earliest. 

Here’s how you can go about it:

1. Draw up a financial blueprint

The first step is to identify the various financial goals you may have and plan your retirement savings accordingly. You may require extra funds to address a long-term health issue, travel the world, take up a new hobby, or just live a comfortable life.

Also Read: Create A Corpus Of Rs 1.01 Crore By Investing Rs 5000 Per Month In This Scheme

2. Lock in on your expenses

It is difficult to predict how things will change over the next few decades. However, a good understanding of the amount of money you are spending today can help you gain a better estimate of how much money you will need post-retirement. 

Since most of us manage our expenses digitally these days, it becomes easier to keep a record of all outgoings. A simple way to calculate your current monthly expenses is to examine your annual bank statement and add up all the debits at the end of the financial year. Divide that figure by 12, and you will arrive at your average monthly expense amount.

For instance, let us assume that your total debits for the last financial year were Rs 5,40,000. Then, your average monthly expenses at present (PV) will be Rs 5,40,000 / 12 = Rs 45,000.

3. Calculate the ideal post-retirement corpus

To figure out how to calculate retirement amount, you will need to account for other parameters such as time till retirement (n) and estimated inflation (r). The future value (FV) of your expenses is calculated as: FV = PV (1+r) ^n

Staying with the example above, let’s assume you have 25 years till retirement, and the average rate of inflation is 6%. Then, the retirement income you would need to generate at the current value of expenses would be: Rs 45,000 (1+0.06) ^25 = Rs 2,01,300 per month.

In simple terms, what this means is that even if your spending pattern remains unchanged, inflation dictates that you will need 4.5x the money 25 years from now to take care of all your outgoings.

Also Read: Do You Wish For A Retirement Savings Of Rs 10 Crores? Invest In These Funds

4. Rejig your personal finance goals

The math equation above lets you work backwards with regard to your retirement calculation by letting you know the amount you will need for your basic expenses. Armed with this knowledge, you can figure out how much you need to save and invest today to be able to generate a monthly income of Rs 2 lakh and enjoy a stress-free tomorrow. 

Retirement is not merely a milestone in your life but rather the beginning of a new journey. The average person can expect to have 20-25 years of life ahead after retirement, wherein expenses and lifestyle needs have to be managed without an active income stream. Retirement planning is, therefore, a crucial exercise that needs to be taken up at the earliest. 

Here’s how you can go about it:

1. Draw up a financial blueprint

The first step is to identify the various financial goals you may have and plan your retirement savings accordingly. You may require extra funds to address a long-term health issue, travel the world, take up a new hobby, or just live a comfortable life.

Also Read: Create A Corpus Of Rs 1.01 Crore By Investing Rs 5000 Per Month In This Scheme

2. Lock in on your expenses

It is difficult to predict how things will change over the next few decades. However, a good understanding of the amount of money you are spending today can help you gain a better estimate of how much money you will need post-retirement. 

Since most of us manage our expenses digitally these days, it becomes easier to keep a record of all outgoings. A simple way to calculate your current monthly expenses is to examine your annual bank statement and add up all the debits at the end of the financial year. Divide that figure by 12, and you will arrive at your average monthly expense amount.

For instance, let us assume that your total debits for the last financial year were Rs 5,40,000. Then, your average monthly expenses at present (PV) will be Rs 5,40,000 / 12 = Rs 45,000.

3. Calculate the ideal post-retirement corpus

To figure out how to calculate retirement amount, you will need to account for other parameters such as time till retirement (n) and estimated inflation (r). The future value (FV) of your expenses is calculated as: FV = PV (1+r) ^n

Staying with the example above, let’s assume you have 25 years till retirement, and the average rate of inflation is 6%. Then, the retirement income you would need to generate at the current value of expenses would be: Rs 45,000 (1+0.06) ^25 = Rs 2,01,300 per month.

In simple terms, what this means is that even if your spending pattern remains unchanged, inflation dictates that you will need 4.5x the money 25 years from now to take care of all your outgoings.

Also Read: Do You Wish For A Retirement Savings Of Rs 10 Crores? Invest In These Funds

4. Rejig your personal finance goals

The math equation above lets you work backwards with regard to your retirement calculation by letting you know the amount you will need for your basic expenses. Armed with this knowledge, you can figure out how much you need to save and invest today to be able to generate a monthly income of Rs 2 lakh and enjoy a stress-free tomorrow. 

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