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.
To assist you through the process of choosing a pension plan, a Retirement Calculator helps you determine the amount of funds that need to be invested per month for retirement purposes. You are required to enter the present age, expected retirement corpus, retirement age, & present savings. Hence, the retirement calculator helps determine how much funding an individual will require to lead a comfortable life post-retirement.
Steps to Use a Retirement Planning Calculator
Provided are the steps to use a retirement calculator:
Step 1:Either write your age directly in the box provided or use a sliding bar to choose your age within 18 to 50 years.
Step 2:Now, either write down your retirement age manually, or use the sliding bar to choose the retirement age within 40 to 70 years.
Step 3:Now select your annual income by using the scroll button to choose between INR 10,000 to INR 1 crore.
Step 4:Decide the growth rate of income throughout the period.
Step 5:Choose the type of current investments, i.e. whether recurring or stagnant, along with the amount to be invested in rupees.
Step 6: Decide the amount of pension you want to receive annually post-retirement.
Step 7:Consider the inflation factor while deciding on the pension amount to be received, which is generally deemed to be 6% by default.
Step 8: Assess the amount of funds required for your desired lifestyle to be maintained; hence, plan your retirement accordingly.
How Does a Retirement Calculator Work?
A retirement calculator is a user-friendly online toolthat helps individualsplan their retirement in a convenient manner. You are just required to provide some basic details, such as present age, age at which you wish to retire, life expectancy, etc.After that, submit some additional information, like present income & expenses, current savings, rate of interest, expected inflation rate, etc. The information & details provided must be accurate, realistic & achievable. The calculator will then provide you with the amount to be saved to accumulate the funds for the retirement corpus.
The formula used by a retirement calculator to calculate the amount of money that would be required after your retirement to fulfil all your requirements according to your lifestyle is as mentioned below:
FV = PV (1+r)^n,
Where,
FV = Future Value
PV = Present Value
r = Expected Inflation
n =Time to Retirement
Let us underst& the concept with the help of an example,
Mr. X is presently 35 years old & will retire at the age of 60 years. He requires INR 35,000 per month after retirement to fulfil his family requirements. He considers his life expectancy to be 80 years. The inflation rate is considered to be 6%.
Now, let us suppose the funds are invested in a bank fixed deposit with an 8% yield. Hence, according to the above-mentioned formula:
FV = PV (1+r)^ n
= 35,000 (1 + 0.06) ^ 25
= INR 150215.5 approx.
Hence, the income required annually = INR 150215.5*12 = INR 18,02,586.
The retirement tenure is 20 years according to the life expectancy, with a yield rate of 8% & an inflation rate of 6%.
Hence, the inflation adjusted rate of return would be = (1+0.08)/(1+0.06) – 1
= 0.00157
Retirement tenure in months = 12*20
= 240
Hence, PMT = INR 18,02,586 / 12
= INR 150215.5
Using the PV function,
Retirement corpus would be = INR 3,00,48,832
Hence, it can be said that for a required annual income of INR 18,02,586, the amount would be INR 3,00,48,832 in the 60th year at a return rate of 8%.
Factors to be considered while calculating the retirement savings
Provided are the factors that should be considered to know if the retirement savings calculated are enough or not
- Lifestyle Objectives
Evaluate whether the pension plan would be able to fulfil the desired lifestyle, such as hobbies, travel, any other expenses, etc.
- Market Volatility
Consider the market fluctuations& financial instability, which can have an effect on the growth of your savings over a period of time. Also, this ensures that a diversification of the portfolio exists to mitigate the risk.
- Inflation
Account for the inflation factor while considering the purchasing capacity to adjust the savings amount in order to maintain the standard of living.
- Withdrawal Strategy
Make a withdrawal strategy that sustains your savings to ensure that your income is sustained throughout the retirement period.
Benefits of Retirement Calculator
Provided are the benefits of a retirement calculator:
- With the help of a retirement calculator, one can assess the amount to be saved per month to receive a huge corpus after the career ends, i.e., post-retirement.
- It also helps to ascertain the opportunities available for investment that can benefit you.
- Check the different investment options available&compare them to find out the most compatible plans available by a competent financial institution. Some listed entities also offer retirement plans nowadays.
- It helps in identifying the different retirement plans available, reviewing & comparing them.
- It helps in setting realistic & achievable financial objectives for retirement purposes.
- It allows reviewing of the current retirement plan & helps take proactive steps to rectify it.
- It helps to simplify the complex calculations into easy, clear, & achievable outcomes.
Conclusion
Retirement plans have become quite important in today’s life as they offer financial security during retirement. As there are many options available, one can choose a retirement plan depending upon their financial needs & lifestyle envisioned post-retirement, making their lives comfortable. A retirement calculator helps in estimating the amount required to be saved to maintain the lifestyle you desire post-retirement. It is an online tool which uses certain details & information to assess the amount of funds required to be invested, hence acting as a useful tool for retirement planning.