As we know, retirement is a critical phase of life for which advance planning is a must. In this digital world comes a tool, namely a retirement calculator, to assist you through this process. A Retirement Calculator helps you determine the amount of funds required to be invested or saved every month for retirement purposes. To calculate this amount, one requires to provide the present age, expected retirement corpus, retirement age, & present savings. Hence, the retirement calculator helps determine how much funds an individual will require to lead a comfortable life post-retirement.
Steps to Use a Retirement Calculator
Provided below are the steps on how to use a Retirement Calculator:
Step 1: Accumulate Information
At an initial stage, gather information like the present age, retirement age, present income, estimated retirement income, estimated savings, etc. Along with this, the expected inflation rate & expected rate of return should also be considered.
Step 2: Select a Retirement Calculator
Choose one of the different retirement calculators available online that best suits your requirements. Choose a retirement calculator that gives the utmost comfort, as some calculators are quite complex to understand.
Step 3: Input Your Information
Now, provide the details required, like present age, income, & retirement age. Along with this, provide your spouse details & income from other sources, if any.
Step 4: Make an estimate of your Retirement Expenses
Calculate an estimate of post-retirement expenses such as healthcare, housing, living expenses, travel expenses, etc. By providing an estimate of your monthly expenses, the calculator will determine the funds that would be required for retirement purposes.
Step 5: Determine your amount of Retirement Savings
Once the necessary details have been provided, the calculator will provide you with an estimate of funds that are required to be saved for retirement purposes.
Step 6: Adjust Your Plan accordingly
If the retirement calculator tells you that the money saved is less than what is required for retirement purposes, adjust your plan accordingly. It may be one by either reducing the expenses, increasing the income, or finding new ways to save funds.
Step 7: Evaluate & Monitor Your Progress
Monitor the progress of the retirement plan & adjust accordingly in case circumstances demand.
How to Use Retirement Calculator?
Below is the formula for calculating the amount of retirement savings:
FV = PV (1+r)*n
Where,
FV = Future Value.
PV = Present Value
r = expected inflation
n = time left until retirement
Let us understand this formula with the help of an example:
Let us suppose Mr Aman is 35 years old at present. He wants to retire at the age of 60 years with a monthly pension of INR 35,000 during retirement. What should be the retirement corpus that should be invested in a bank FD to yield 8% with 6% inflation?
Using the above formula,
FV = 35,000*(1+6%)*(60-35) = INR 1,50,215.5
Converting it to annually = 150215.5*12 = INR 18,02,586
Annual income requirement in retirement = INR 18,02,586
Retirement Tenure = Life Expectancy – Retirement Age = 80 – 60 = 20
ROR on corpus = 8%
Inflation = 6%
Inflation adjusted rate of return = (1+0.08)/(1+0.06) – 1
= 1.89%/12
= 0.001575
Retirement Tenure in Months = 20 years * 12 = 240
Hence, using an Excel calculator, the amount of corpus required = INR 3,00,48,832
Benefits of Using a Retirement Calculator
Provided below are the benefits of using a retirement calculator:
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Helps You Plan Your Retirement Goals
Provide some details such as present income, expenses, & financial obligations so that the retirement calculator can determine the amount required to be saved to meet retirement goals.
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Helps You Determine the amount of Savings
Enter some details like present age, retirement age, or any other details required. Then, the calculator will determine the savings required for retirement purposes.
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Helps you Estimate Your Retirement Income
A retirement calculator lets you calculate retirement income on the basis of some factors, such as investments, savings, & other sources of income. Retirement income can be calculated by considering certain factors, such as rate of return & inflation rate.
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Helps You Adjust Your Retirement Plan
Some changes in the age of retirement, income, or any other scenario help adjust the Retirement Planning accordingly.
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Helps You Make Informed Investment Decisions
Depending on the retirement income in varied investment situations, a retirement calculator will help you make informed investment decisions. For this purpose, you are required to input the different rates of return to determine the impact of the investment decisions on the retirement income.
How to Know the Retirement Corpus?
To calculate the retirement corpus, follow the below steps:
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Estimate your retirement expenses:
To calculate the retirement corpus, you should get an estimate of the post-retirement expenses, including healthcare, housing, leisure activities, etc.
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Determine your retirement age & life expectancy:
Determine the age of your retirement & estimate what your life expectancy is to analyse how long your savings will support you.
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Consider inflation:
Consider the inflation factor while making an estimate of retirement expenses to adjust accordingly.
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Calculate your desired retirement income:
Calculate the amount of income you think would be enough to meet the financial objectives post-retirement, maintaining your desired lifestyle.
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Assess your income sources:
Make a self-assessment of the different income sources, such as any investments, pension, social security benefits, etc.
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Use a retirement calculator:
Input the personal & financial details into the retirement calculator to ascertain the savings needed to maintain a lifestyle post-retirement. This should be done considering factors such as the number of years left in retirement, the expected rate of return on investments, etc.
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Adjust your savings plan:
Adjust your plan depending upon the outcome of the retirement calculator, hence meeting your goals & securing a financial future.
Conclusion
Retirement planning has become important to ensure financial security & maintain the desired lifestyle post-retirement. A retirement calculator plays a vital role in this process, helping estimate the amount required during retirement &further assisting in making prompt financial decisions.