Gone are the days when retirement meant bent backs, and a sad life confined to the home. Today, retirement has evolved into something beautiful. In fact, today seniors are living it up. Travelling, re-connecting with friends, and generally doing everything that they missed earlier due to their responsibilities. They truly embody “YOLO” – You Only Live Once!
But to live this life, you need to be financially prepared. And the process starts much before retirement.
How Much Money Do I Need To Retire?
Our ‘3A2D’ formula can estimate this for you. It is not magic, but it is a rather magical retirement planning calculator.
3A stands for Aim, Assessment, and Awareness. 2D stands for Discipline and Deal. Read on and you will understand how retirement planning is not rocket science.
Aim:
Do you constantly think about ‘how much money do I need to retire?’ This may ease the worry.
* Take into account current expenses, planned and unplanned future expenses such as children’s higher education, marriage, health, and others
* Provide for inflation, especially medical inflation
*Add all this and put a number
That is your aim. It is important that you put a number, as this makes it goal-oriented and easier to chase. The aim number estimates how much money is needed to retire.
There is a scientific method to arrive at this number. It uses the concept of future value and present value. In layman terms, it tells you the worth of money by adjusting for inflation and interest rates. It sounds complicated, but it is not. In fact, Microsoft excel has these functions built in. Otherwise, IndiaFirst Life pension plans simplify the calculation for you.
How to calculate retirement savings
Here is an example:
Imagine you need Rs. 10,000 p.m. (as per its worth today) to lead a comfortable life post-retirement. You are 35 years old today and you will retire at 60. Can you work out the retirement corpus you will need on investing the retirement savings in a bank FD with 8% interest? For the purpose of this example let’s assume inflation at 6%. Now calculate the future value of this money.
FV = PV(1+r)^n
FV = future value
PV = present value
r = expected inflation (assumed at 6% here)
n = time till retirement (60-35=25 years)
FV = 10,000 (1+0.06)^25 = 43,000
This implies that today's Rs. 10,000 will possess an astounding value of Rs. 43,000 after a span of 25 years. Now, in order to earn that amount per month post-retirement, how much money must you have as a corpus when you begin retirement?
Now you can use the present value (PV) formula in excel and derive the amount. Let us call it X. So, X is the amount you must have at the beginning of your retirement to earn Rs. 43,000 per month. Once you have this goal, you can work out how much you need to save per year to reach this amount.
Now that you have your aim, you must complete an assessment and be aware at all times. In both cases, we recommend that you get professional help.
Assessment:
This is your financial health check-up. Methodically record your inflows and outflows. With these details, you can identify where you are spending your money and where there is potential to save. Then work out your net worth, which simply means subtract your debts from assets and see what you are left with. Next, evaluate your emergency fund (if you don’t have one, begin now), your insurance, and your investment portfolio. And you are done.
Awareness:
Awareness is your knowledge about what is happening around you. Understand the macro-economic trends. Check interest rates, inflation, watch out for recessionary trends, and so on and so forth. Check what is happening in the mutual funds space, in the equities space. Apply all knowledge to your own financial health and see where you stand. You will understand the course of action needed.
Discipline:
You know where you stand financially. And therefore, you know what is left to be done. It is an action plan to put aside money and reach your goal. This requires financial discipline. Today, there are several tools that help you achieve your plans. Whether systematic-investment-planning (SIP), ULIPs, or any method that you choose, ensure that you stick to it and only add. Here, we insist that you get professional help.
Deal:
This refers to the various schemes or plans that are available to you. There is a plethora of plans but the best pension plan in India is the IndiaFirst Life Guaranteed Pension Plan. It guarantees an income for you as long as you live by giving growing returns that beat inflation. The plan also offers additional options that give you more benefits and value.
Retirement planning is a crucial part of life. It provides peace of mind by reducing stress and anxiety related to money matters in the future. It also gives you financial independence to pursue activities and hobbies without having to earn. In summary, it gives you the confidence to enjoy your senior years to the fullest.
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