Calculating a retirement corpus that can support your lifestyle
Here is a look at how to calculate your retirement corpus:
Make the right projections/ assumptions:
Foremost, you need to make the right projections, including your existing age, the age of retirement, life expectancy, annual income, income growth rate, current savings for retirement, monthly expenses and type of investment plans - be it fixed deposits, Mutual Funds/ULIPs or stock markets. Then you need to consider the rate of returns from your investment plans - both for pre- and post-retirement years. You also need to take into account the existing rate of inflation.
Account for inflation adjusted returns:
You must always remember to consider inflation as a vital factor, while calculating yourretirement corpus. Inflation results in rising cost of living, and the actual value of your retirement corpus will erode substantially by the time you retire. In other words, the actual rate of returns from your investment plans will dip sharply, in the face of rising inflation. So, it is important to have a futuristic point of view, while retirement planning.
For instance, for a 30-year-old individual, having life expectancy of 85 years along with pre- and post-retirement returns as 14% and 7% respectively, the inflation adjusted returns can be calculated by using the formula: (1+rate of return post-retirement) · (1+inflation rate))-1) *100. Suppose the rate of inflation is 7%, then as per the formula, inflation adjusted returns will be 0.93%.
Project for your annual expenses:
Knowing the amount of money required to support your lifestyle in the golden years of your life also means considering your existing annual expenses. You are then required to adjust the amount with the annual rate of inflation. The Future Value formula, where you have to provide variables such as the amount of money, number of years and rate of inflation can help you arrive at the adjusted rate of inflation. The formula is: Future value = Present amount * (1+inflation rate) ^number of years. For instance, a 30-year-old individual, having existing annual expenses of Rs 7.2 lakh will require Rs 21,01,089 for the same after 30 years, as per the Future Value formula.
Calculate your retirement corpus:
Now you can calculate your retirement corpus using the present value formula: Present Value = Future Value · (1+r) ^n, where r is rate of returns, while n is the number of years. For example, if a 30-year-old individual with a life expectancy of 85 years, annual expenses of Rs 54.8 lakh and inflation-adjusted returns of 0.93% wants to calculate the retirement corpus using this formula, the required retirement corpus will come to around Rs 12.28 crore.
Alternatively, you can also use online tools such as retirement calculator to arrive at the figures of your retirement corpus. For example, if you are a 30-year old individual with an annual income of 7.5 lakh, life expectancy of 85, current income growth rate of 5%, monthly expenses of Rs 10,000, current savings for retirement as Rs 6,000, investment in fixed deposit, rate of interest at 11% and existing rate of inflation at 7.5% , then you can calculate the amount required for retirement, using HDFC's Life's retirement calculator. Taking into account the above-mentioned figures, you will require Rs 26, 204, 490 to fund your retirement. If you add to it the growth of your current savings - at Rs 60,376, - your total retirement corpus now stands at Rs 26, 264,866. As per the calculations, you now need to save Rs 18,187 each month for 30 years.
Once you have calculated your retirement corpus, and know how much to save, you have taken the right steps towards retirement planning. You can now zero in on the right investment plans to meet your target. Annuity plans, like HDFC Life Pension Guaranteed Plan can help you have a secondary source of income in the golden years of your life. This plan is a single premium annuity product, providing a regular guaranteed income for lifetime.
^ The word "Guaranteed" and "Guarantee" mean that annuity payout is fixed at the inception of the policy
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