One of the most important aspects of financial planning is saving up for retirement. Accumulating a significant retirement corpus will result in a life that is comfortable and stress free after retirement. But how much would be enough? That is a vital question, and you must do the required calculations, consider various factors and then come to a figure for your retirement corpus.
Let us look at how you can begin calculating your retirement corpus.
Decide on your remaining working years
First, you must decide when you want to retire and how many years you have left until that. The right retirement age is never fixed, and it may vary depending on your profession, income, life goals etc. While it is tempting to retire early, you must keep in mind that that elongates your post retirement period and thus you would require a much larger corpus. Additionally, early retirement may only be feasible if you have a very high income since you can build a large corpus in a shorter period.
Factor in inflation during accumulation phase
Inflation may be the most neglected aspect of retirement planning. Retirement plans are very long term, and they may go on for 2-3 decades. Inflation is bound to happen in that time, and you must take it into account when deciding your retirement corpus, or else your hard-earned retirement fund would turn out to be inadequate after retirement. A 6% inflation rate may be considered for calculating your retirement corpus.
Calculate monthly expenses after retirement
Once you decide on the years left until your retirement and know the inflation rate, you must estimate your monthly expenses post-retirement. Too low of an investment now would not allow you to lead the life you envision after retirement. To calculate monthly expenses after retirement, consider your monthly expenses at present and factor in the rate of inflation.
Rate of inflation after retirement
Just as you are considering the inflation rate during the investing period, you must also factor in the inflation rate after retirement. As your retirement plan may go on for 2-4 decades, the inflation rate is also bound to fluctuate. Therefore, you must look at the inflation both at the accumulation stage and the post retirement stage.
Expected rate of return during retirement
When you’re earning an income and investing for your retirement, you have a greater flexibility to invest in higher risk options and stand to gain higher returns. Even if you incur losses, you will still have time to make up for them by stretching your retirement age and enhancing your earnings. You can allocate a higher percentage to equities to earn more. But once you retire, you cannot take much risk and you may have to invest in safer options.
Calculating the Retirement Corpus
Once you calculate and estimate the variables above, you can input them in a retirement calculator and easily find out how much corpus you would need. You can modify the figures to come to a desirable figure and change your retirement plan accordingly.