How much money do I need to retire from a job how to calculate
Referring to a case study, when a man was 25, he already dreamed about financial independence. His father was enjoying his job even when close to retirement, while the man was considering retirement at the outset itself. He wanted to retire for the sake of his financial independence. On the other hand, his father was planning for retirement as it was inevitable due to his age. Both of them had different perspectives about retirement.
But there was one thing common between the man and his father i.e., both of them wanted to know the answer to the same question – How much money does someone need to retire
The bigger the retirement corpus, the more income it will yield.
The concept of retirement corpus
For your lifestyle after retirement, one must ensure sufficient retirement income and it must be yielding. Retirement income comes from the retirement corpus. The challenge is how to build a big-enough retirement fund! How to do it? You have to earn more, spend less, save high, and use your savings to build a retirement fund.
These 4 steps are worth remembering for building a proper retirement fund:
1. Generate Income: one can generate income by doing a job or business. Income generation should be done to empower oneself to build a big-enough retirement corpus.
2. Save Money: The first step is to generate income. Then, to build a stable retirement corpus, one must also save sufficient money. Because this saving will ultimately build the retirement fund for the rest of the retired life.
3. Retirement Corpus: The money that is saved from one’s income should be invested well to build the retirement corpus fast enough. But the size will grow at a rather slow pace – especially in the initial days. One should always continue to contribute to this cause year after year and must not get disheartened.
4. Retirement Income: Building a big retirement corpus is a very important milestone in this journey. Reinvesting one’s retirement fund so that it starts generating regular income after post-retirement is one more way.
How to estimate the size of the retirement corpus?
This estimation can be done in three steps, but the calculators have to do back-calculation.
Our first step has been taken by the retirement calculators India for this calculation:
1.Monthly Expense: This is the first step for calculation. Try to estimate what will be the expense that you would like to carry after your retirement. You must also include and consider all the other additional expenses such as medical, travel etc. which may increase after your retirement.
2. Expected Returns: When you are in a job, you can take risks and hence you can afford to invest in high-risk and high-return investment options. But after your retirement, your capability of taking risks falls drastically. Hence your expectation from your returns from investment should be accordingly tuned.
3. Size of Corpus: Lastly, this is the final step done by the Retirement calculator India. This step will let you know what will be your required retirement corpus. To calculate this, the retire calculators have to use this simple formula: https://www.wealthcareindia.com/retirement-calculator/
Estimate monthly expenses
In this case, we will be referring to an example to understand simply.
Suppose you are 59 years aged. And after the next few months, you will be going to retire from your job. What will be your expenses after retirement?? In this case, you should neither underestimate nor overestimate the requirement. First, you may consult any retirement calculator and create a break-up of your total expenses into the following six (6) heads, then, quantify each one of them as depicted through an example:
We have Home Management expenses which include Utility bills, food, maintenance etc: Rs.4.5 Lakhs per annum. Then we have, Money required for managing annual vacations of Rs.0.5 Lakhs per annum. For health care, 1 lakhs, income tax for the government is Rs 1.5 lakhs, again 1.5 lakhs for any kind of emergency, and 1.5 lakhs must be added back to the retirement fund to negate the effect of inflation.
So, after the retirement calculators calculate, it may come up to Rs 10.5 lakhs per year.
Estimate the size of the corpus
According to the calculation in the Above given example, the retirement calculators have estimated a calculation of 10.5 lakhs per year. So, to meet this expense, one’s retirement income must be at least 10.5 lakhs per year. And this income has to come from the retirement corpus. So, the retirement corpus must be big enough so that it can generate Rs.10.5 lakhs per year of regular income.To know the size of the Retirement corpus, the retirement calculators of India use the following formula:Size of corpus= Annual Income Requirement/ Investment Yield
Adjust for inflation
Adjustment for Inflation is required because the necessary value if he retires tomorrow is Rs 1.5 Crores. If he/she retires after 20 years, the required corpus will be much higher.
Now, the next question is, What will be the exact value of Rs.1.5 Crore after 20 years and How much will it increase?
To get this solution, the retirement calculators use the following formula: Corpus(t) ×(1 + 6%) ^n = Corpus(n)(here, 6% average Inflation for the next 20 years).
Conclusion
When a person wants to know how much money he/she needs to retire at 45, the calculators start with expense calculation to get the solution and to estimate the size of retirement corpus required, they use the last formula mentioned above.
