Want to retire early? Use this retirement calculator to plan
When it comes to money, most people have only dreams and no plans!
And, those who have plans - they have these plans locked inside their heads. There is no written plan, no reviews. That's why, most of us do not achieve our financial goals.
If you are like me, you have thought about retiring early and living on a beach or spending time in the hills may be?
In that case - this blog post is for you. It talks about the importance of retirement planning, and how you can create your own mini financial plan for a happy and relaxed retired life. You will get these ideas, plus a retirement calculator to find out.
Wondering how much would you need in your retired life, is no easy calculation and, not a one-time exercise!
Imagine, starting off on a long road journey, and half way through, you run out of fuel in the middle of the desert, with no nearby fuel station!
This journey could be scarier if you start your journey, let's say from Delhi to Jaipur. When you are driving yourself from Delhi, what are the few essential things you need?
GPS, Google Map, Fuel. Map to give you directions and GPS as the technology or know-how.
For a road journey from Delhi to Jaipur, if you have a Delhi to Rewari map, you can never reach Jaipur!
Retirement planning also requires that you have plans, directions and some know-how with continuous checking.
You need the right directions and continuous check, to know that you are going on the right path.
Sometimes, discussion with a friend can get you thinking and lead you in wrong directions. More so, when that friend is not an expert in financial planning!
But the worst idea would be, a death-bed regret that you’ve spent your life chasing what someone said you should, do instead of what you really wanted to do.
Your retirement plan will vary based on your current age and at what age you want to retire.
Let’s look at some possible scenarios to understand the options:
- Scenario-1: You are in your 30's, 40's and wish to retire by 60: Let’s assume that your current age is 40. And you would like to retire at your age 60. With life expectancy at 80. You would like to know; how much amount is required by the time you turn 60. If you haven't made any saving for this goal, you would like to know the ideal saving per month to achieve this goal.
- Scenario-2: You are in your 30's and wish to retire early by 40:
Do You recall Hrithik say in the movie: Zindagi na Milage Dobara
To Retire at their age 40, is another dream for some people. To retire early or to seek financial freedom at any age and to learn about this freedom, you need to grasp it and grab it. In this movie, Hrithik has the motto to work hard till 40 and then retire with a huge bank balance by his age 40. As a result, he works accordingly. So, if you also fall in this category, stay tuned as the easy calculations below give you early retirement calculations, to help you retire by 40.
- Scenario-3: You are already in your late 50's and need a better retirement plan:
Let’s assume your age is 59 and you are now nearing your retirement age of 60. You would like to know, that from your age 60, till your age 80 (assumed life expectancy), how much amount you need to be set aside exclusively, for this retirement goal.
- Scenario-4: You are already in your late 60's or 70’s:
Assume, you are already in your 60's or 70’s and have started living with your lifelong savings as your retirement corpus. You would like to re-assess if your current saving will last your life time?
Based on the above scenarios, different calculations are required.
Can this be one calculation? Is it a complex process?
Can a common man do it all by self or does he need an expert, like a qualified and experienced financial planner to help out?
Once you understand these steps and admit it, you need to act on it.
- The first step is the calculate to exact amount of your household expenses currently including your groceries, internet, mobile, rent, repairs, maintenance of house etc. You can take the help of this household-expenses-calculator to make these calculations.
- The second step is understanding how inflation is going to increase your current household expenses and thus, what would be your monthly household expenses when you reach your ideal planned retirement age, let’s say 60. So, if you would assume current inflation of 7 % (no matter what Modi might say to bring it down to 5 % or less, last 30 years’ data in India, indicates 7 %). You can take the help of this inflation-calculator to make these calculations.
- Now, with the use of this retirement-calculator, find out the value of inflation linked monthly household expenses.
- Say, your current household expenses are Rs. 1 lakh per month, at your assumed age of 40, then for your retirement age of 60, this household expenses would become Rs. 3.87 lakhs per month and increasing every year, thereafter.
- The third step is to identify, what should be your retirement age, or when you think you would ideally like to be financially independent if that's another way of calculating retirement age. So, let's say, this is 60.
- The next step is to know your life expectancy in India. So, you may expect to live to 75 (Source: UN Population Division World Life Expectancy for year 2050), or you may like to make it more conservative at 80.
- Now, you have to also imagine, when you reach your age 60, would there be increase or decrease in your household expenses and other liabilities. Liabilities like home loan etc., would have gone and children would have finished with the education and you may not have other additional liability. But, there may be increase in your other goals, like you may now like to go more frequently on vacations. You may now like to give out more gifts. Or, you simply like to travel more. Medical expenses may also go up. So, factor in these incremental costs and include them in your monthly expenses.
- At this stage, you should have factored in your spouses' number of years in retirement, after you also or increase your life expectancy by 5 if your spouse is 5 years younger than you.
- Now, with the help our retirement-calculator, you can estimate that a Rs. 3.87 lakh monthly expenses would be required (from your starting age of retirement of 60, to your life expectancy of 80). This leads to the calculation as to how much corpus or how much amount, would essentially be required, at your age 60, to give you a steady monthly pension of Rs. 3.87 lakhs, increasing with inflation every year. This would now be calculated, on an assumption of post retirement return of (a safe and conservative) 9%. This amount, using the calculator would come to Rs. 7.55 crores.
- The next step is to find out, how much do you need to save per month, in order to accumulate this corpus of Rs. 7.55 crores by your age of 60. Again, we take an assumed pre-retirement return of 12% (could be a mix of equity: debt, depending on your age, risk profile). You have to now calculate, the total investments done till now, towards this goal exclusively; then reduce that amount from the corpus of Rs. 7.75 crores but on future value.
- Now, using this retirement-calculator, you can find out the amount of investment required to reach this goal of Rs. 7.75 crores in the next 20 years. Here, in our case, it comes to Rs. 76,389/- per month fixed for the next 20 years. Simply, you need to save Rs. 76,389/- per month towards the retirement planning goal, if you haven’t made any investment towards this goal till date.
- Having calculated this, there is another option again using the retirement-calculator. According to Aon Hewitt Salary Increase Survey 2014-15, the average annual increment in salary in India, is 10 %. If you increase your investment every year by 10% in line with your annual increment, then you have to just save Rs. 38,000/- per month, instead of Rs. 75,000/- per month fixed. This makes it even easier and convenient, for you to start saving and then, gradually increase, your monthly contribution, by 10% every year.
But whatever you choose, brace yourself, because people are always going to tell you you’re not right!
That’s why you need to know, why you're doing and what you're doing. Know it in advance. Use it as your compass and optimize your life around it. Then, let the other goals be secondary.
So when it’s the moment to decide, you can choose the value that you already know matters most to you.
Through this blog, I have made the entire process of retirement planning calculations more simplified so that you can take the right decisions at the right time.
There are many options for investing for the retirement goal before reaching the retirement age and many after, also. This blog here, is limiting to the basic idea of financial planning made easy for retirement planning and is not getting into where and how, as that I shall discuss in a separate blog.
With these 10 steps, you can plan your own retirement or you can get started with retirement planning.
This is to try to make it simplified if you were looking at the easy steps to calculating retirement.
This is not a retirement plan!
So, go ahead, make plans, get your finances organized.
It's important to get started, not try to be perfect. 80% done is called, started. There is a very thin line between procrastination and perfectionism!
Keep on reviewing your goals periodically just like you would check your directions on a road journey.
Treat retirement like a journey! Not a destination! Enjoy the journey!
What I have shown here is indeed, an easy to do yourself way for your retirement calculations. For more detailed, comprehensive, professional in-depth analysis, you have to approach a qualified financial planner.
Happy Retired Life! Enjoy it!
You can download c PDF copy of this blog here: want-to-retire-early-use-this-retirement-calculator-to-plan-by-taresh-bhatia
Photo Credits: Flickr