Module for Beginners

Personal Finance

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Calculation guide : How much do I need to retire?

Now that you have a basic idea about the taxes in India, let’s talk about an important milestone in everybody’s life – retirement. When you get your first job, your retirement is hardly the first thing you’ll think about. But as you age and enter your thirties or forties, your retirement looms in closer. And that’s when most people frantically start looking for avenues that can help them retire comfortably. But while it’s always a good thing to start retirement planning at some point, it’s an even better idea to start early. The importance of retirement planning cannot be stressed enough.

If you’re just looking out for your first job, or if you’ve just received your first paycheck, you’ll find this retirement planning guide very useful. But what if you’re further down your career? Perhaps 10 or 15 years in? Never mind, you will still find this retirement planning guide very helpful.

One of the first things you’ll ponder about when you think of retirement planning is this – How much do you need to save for retirement? To answer this question, we’ll need to take up a theoretical scenario and make some assumptions in this retirement planning guide.

Saving for retirement: An example

Let’s take up the case of Subash, who, as we saw earlier, earned his first paycheck at 24. One year later, at 25, he learned about the importance of retirement planning and decided to start saving up for his golden years. So, he started off with some assumptions and projections.

• He wanted to retire at 50.
• Post-retirement, he expected to live for another 30 years, up until the age of 80.
• Currently, let’s say he requires around Rs. 30,000 each month to lead a comfortable life.
• And he assumes that even post-retirement, he can live comfortably with Rs. 30,000 each month.
• This makes his annual requirement post-retirement Rs. 3,60,000.

So, given these inputs, would you like to take a guess and come up with an estimate about how much he will need to have saved up at the start of his retirement phase, when he’s 50 years of age? Logically, this method below seems right, doesn’t it?

• Subash requires Rs. 3,60,000 per year to live comfortably.
• He estimates that his post-retirement life will span around 30 years.
• So, he’ll need around Rs. 1,08,00,000 to get through his post-retirement.

Right? Well, not quite. Remember how we spoke about the time value of money in an earlier module? You’ll recall that over time, the value of money reduces, because inflation comes into the picture.

This means that if Subash needs Rs. 3,60,000 annually to meet his needs today, he’ll need a lot more to meet those same needs in the future. But how much, exactly? That’s what this retirement planning guide will help you figure out.

Finding the future value of present requirements

Remember the formula for calculating the present value of future cash flows, as we saw in the module on valuation? Let’s take a look at it again.

 Present value of a future cash flow ‘n’ years from today = future cash flow ÷ (1 + discount rate)n

Now, using this formula, we can arrive at the future value of a present cash flow. That would go like this.

 Future value of current requirements ‘n’ years from today = Present cash flow X (1 + inflation rate)n

Notice how the rate is the discount rate in the first case? And in the second case, it’s the inflation rate? That’s because when you wish to convert future cash flows to their present value, you discount them. But when you want to find out the future value of present cash flows, you need to use inflation, since that’s the rate that will influence the time value of money later on.

Let’s use this formula to calculate how much Subash will require throughout his post-retirement life. Here are the parameters we’ll use for this calculation.

• Number of years till retirement: 25 years
• Number of years post-retirement: 30 years
• Amount required each year: Rs. 3,60,000
• Inflation rate: Assumed to be around 6% in the long run
 Year after retirement Number of years left between now and the said year Amount of money required annually (Rs.) Inflation rate Future value (Rs.) Comments and calculations Year 1 25 3,60,000 6% 15,45,073 = 3,60,000 x (1 + 6%)25 Year 2 26 3,60,000 6% 16,37,778 = 3,60,000 x (1 + 6%)26 Year 3 27 3,60,000 6% 17,36,045 = 3,60,000 x (1 + 6%)27 Year 4 28 3,60,000 6% 18,40,207 = 3,60,000 x (1 + 6%)28 Year 5 29 3,60,000 6% 19,50,620 = 3,60,000 x (1 + 6%)29 Year 6 30 3,60,000 6% 20,67,657 = 3,60,000 x (1 + 6%)30 Year 7 31 3,60,000 6% 21,91,716 = 3,60,000 x (1 + 6%)31 Year 8 32 3,60,000 6% 23,23,219 = 3,60,000 x (1 + 6%)32 Year 9 33 3,60,000 6% 24,62,612 = 3,60,000 x (1 + 6%)33 Year 10 34 3,60,000 6% 26,10,369 = 3,60,000 x (1 + 6%)34 Year 11 35 3,60,000 6% 27,66,991 = 3,60,000 x (1 + 6%)35 Year 12 36 3,60,000 6% 29,33,011 = 3,60,000 x (1 + 6%)36 Year 13 37 3,60,000 6% 31,08,991 = 3,60,000 x (1 + 6%)37 Year 14 38 3,60,000 6% 32,95,531 = 3,60,000 x (1 + 6%)38 Year 15 39 3,60,000 6% 34,93,263 = 3,60,000 x (1 + 6%)39 Year 16 40 3,60,000 6% 37,02,858 = 3,60,000 x (1 + 6%)40 Year 17 41 3,60,000 6% 39,25,030 = 3,60,000 x (1 + 6%)41 Year 18 42 3,60,000 6% 41,60,532 = 3,60,000 x (1 + 6%)42 Year 19 43 3,60,000 6% 44,10,164 = 3,60,000 x (1 + 6%)43 Year 20 44 3,60,000 6% 46,74,773 = 3,60,000 x (1 + 6%)44 Year 21 45 3,60,000 6% 49,55,260 = 3,60,000 x (1 + 6%)45 Year 22 46 3,60,000 6% 52,52,575 = 3,60,000 x (1 + 6%)46 Year 23 47 3,60,000 6% 55,67,730 = 3,60,000 x (1 + 6%)47 Year 24 48 3,60,000 6% 59,01,794 = 3,60,000 x (1 + 6%)48 Year 25 49 3,60,000 6% 62,55,901 = 3,60,000 x (1 + 6%)49 Year 26 50 3,60,000 6% 66,31,256 = 3,60,000 x (1 + 6%)50 Year 27 51 3,60,000 6% 70,29,131 = 3,60,000 x (1 + 6%)51 Year 28 52 3,60,000 6% 74,50,879 = 3,60,000 x (1 + 6%)52 Year 29 53 3,60,000 6% 78,97,931 = 3,60,000 x (1 + 6%)53 Year 30 54 3,60,000 6% 83,71,807 = 3,60,000 x (1 + 6%)54 Sum of all future values 12,21,50,705

So, to retire comfortably at the age 50, Subash will need to have Rs. 12.21 crores when he moves into the retirement phase of his life. That’s a huge sum, isn’t it? This is why it’s essential to understand the importance of retirement planning and start investing for that phase early on in life.

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How much do you need to save for retirement?

You too can come up with a set of estimates about when you wish to retire and how much you’ll need to live life comfortably post-retirement. Thereafter, using the same process detailed above, you can calculate the amount you need for retirement. Remember to factor in inflation, and while you’re at it, be as conservative as possible. So, even if your required corpus is inflated, you’ll be left with more funds than you need. And that’s never a bad thing, is it?

Wrapping up

12.21 crores is a huge sum to save up. Is it even possible? If that’s what you’re wondering, then here’s the answer - with the right kind of financial planning, it definitely is. The key is to invest smartly. And while we’re on the subject of investing for retirement, we definitely need to mention EPF and PPF - both of which are good long-term investment schemes. Want to know more about them? Head to the next chapter to find out.

A quick recap

• To calculate the amount needed for your post-retirement life, you need to factor in inflation.
• This formula can be useful: Future value of current requirements ‘n’ years from today = Present cash flow X (1 + inflation rate)n
• You can come up with a set of estimates about when you wish to retire and how much you’ll need to live life comfortably post-retirement.
• Then, you can use the above formula to calculate the future value of the money you’ll need. This will give you good idea of how much you need your money to grow.

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