RETIREMENT CORPUS CALCULATION LOGICS EXPLAINED & EXEMPLIFIED.

I am already into the 5th year of my Retired Years. (I fixed up 58 Years as Retirement Age much much earlier in my career.)

Today I share an article I authored for WealthCon magazine few years back.

Believe me ,In Personal Finance ,most of principles are eternal truth, they never change.

Let us be clear about Retirement First.

Everyone should work till last breath, as Bhagavat Gita states

नियतं कुरु कर्म त्वं कर्म ज्यायो ह्यकर्मण: |
शरीरयात्रापि च ते न प्रसिद्ध्येदकर्मण: || 8||

You should thus perform your prescribed Vedic duties, since action is superior to inaction. By ceasing activity, even your bodily maintenance will not be possible.

But when there is no compulsion to work to earn to manage livelihood expenses, but it is personal choice to work to celebrate the skills mastered over years in professional field, Retirement is reached. It does not relate with age, but with mindset.

I share Dr Ram Sir (Founder of Wealth Con ) views in this reference.

Q. What is retirement planning?

Dr Ram: –

If retirement means cessation of work and watching TV whole day or chatting with buddies then it’s wrong notion.

My views about retirement are different: –

According to me retirement doesn’t mean cessation of work.

Retirement means cessation of financial worry.

One should continue some work as per physical or intellectual capacity till end of life.

Even if you stop seeing patients after 65 years, you can continue some sort of work.

In nutshell, retirement is cessation of financial worry and get financial freedom.

Two issues are certain in our lives. First is Taxes & second one is Death. But before death there are sunset years of life-Retirement Years. For these years, when earning money is difficult due to limited physical & mental powers, we must make necessary provisions in form of Retirement Corpus. Retirement Corpus Creation is Mandatory & Non-Negotiable Goal of our Life.

NO ALTERNATIVES AT ALL

This article explains logics for Retirement Corpus Calculation.

Also examples for different age at 36,46&56 is shared.

Please study first table shared.

It is divided in 3 parts.

Back to Basics.

Forward into Future.

Ultimate Outcomes.

You can download this Excel Spreadsheet by following below mentioned link.

https://docs.google.com/spreadsheets/d/1wzCPP92TmO8k3t9-ocGuIRTeTY95Gu7U/edit?usp=sharing&ouid=108495163926586825712&rtpof=true&sd=true

Green cells are entries to be done, while yellow cells are outputs & it is formula based-embedded in spreadsheet.

Back to Basics.

Retirement planning is very long game plan with many assumptions, simply because for time span of 60 years, (Earning start at 30 years to Exit from planet by 90 years of age) no certainties can be assured.

So, there will be few certainties like your age, but there will be many assumptions like rate of inflation, rate of investment returns. Wherever I have assumed, I have tried to be reasonable & rational. One can have different assumptions as per one’s understandings & choice, fair enough. For this article I have assumed 8% Rate of Inflation whole through life & 9% as Rate of Investment returns in RETIREMENT years. Accordingly, I have calculated Inflation Adjusted Return for Retirement Corpus Calculation. What is Inflation Adjusted Return & how it is calculated, is to be explored by you, easily available on search engines with right key words.

As simple As That, Sirs

Cell C6 is not relevant for this article.

Forward into Future.

Be honest with yourself to enter details in C11 for annual expenses. If inputs are inaccurate, output will definitely be inaccurate.

GARBAGE IN, GARBAGE OUT

Any cash outflow is marked with – sign, in Excel financial formulas so Cell C 11 identifies it accordingly.

For illustration purposes, in this Excel Sheets, I have employed figures, I find relevant for average citizen of Tier 3 citylike Bharuch Gujarat. Replace it as you find appropriate for you.

Certain expenses in present life style may not be there in Retired Years, for example EMIs for various liabilities & Kids specific expenses, as they will be financially independent of parents by then. One may exclude such expenses for Retirement Corpus Calculation. Apart from these 2 specific expenses, rest are usually livelihood expenses only for couple, which will definitely demand provisions in Retired Years. So, derive annual expenses figure accordingly.

Let me make one issue clear, Financial Independence Planning is different from Retirement Planning. This article discusses only Retirement Planning Corpus Calculation.

One can become Financially Independent much before Retirement Age & One may not be Financially Independent even at Retirement Age.

Cell C13 defines likely annual expenses at age of 60 years, when Retirement starts.

To derive value in Cell C 13, I have employed FUTURE VALUE formula under Financial Formulas tab of Excel, employing 8% as inflation rate & present annual expenses as present value. Employ type 1 as we need to derive figure at Begin.

 If at all, you are novice in Excel Financial Formulas, Google- How to derive Future Value in MS Excel, number of videos will guide you.

Please appreciate that annual expenses calculated as 6,00,000 Rs. at age 36 increases to 38,04,708 Rs. as shown in cell C-13 at Retirement Age 60 due to Inflation.

This is BASE of expenses stream, for Retired Years, which are definitely going to increase year after year because of inflation till life expectancy of 90 years.

90 years may appear too long, but Retirement Planning must make provisions for wife as well, who is usually younger & is likely to survive few more years after husband departs.

Ultimate Outcomes.

Cell C15 is Ultimate Outcome- Retirement Corpus Required at Retirement Age 60.

As derived in cell C-13, person aged 36 with calculated annual expenses 6,00,000 Rs. will require 38,04,708 Rs. annually at Retirement Age 60 & there must be Ready Corpus to generate this cash inflow, year after year, for 30 years & inflated by 8% year after year. This is logic why Inflation Adjusted Returns must be employed in calculations.

Present Value Function calculates corpus required to generate such inflation adjusted cash inflows for defined 30 years, year after year.

I have used Present Value Function under Financial Formulas tab of Excel to derive this value, employing calculated Future Value of Annual Expenses- as cash inflows at Annual Intervals till life expectancy at Inflation Adjusted Returns.

Please understand fact that inflation will prevail in Retired Years as well & whatever returns aimed on investments must factor in eroding effect of Inflation on returns.

Any journey starts with clarity of Destination.

Cell C 15 is clear destination to reach.

Appreciate that for person aged 36 years with annual expenses 6,00,000 Rs. will need 38,04,708 Rs. for annual expenses at Retirement Age 60 as per cell C-13 & to get inflation adjusted cash inflow with base being Cell C13-38,04,708 Rs. for next 30 years, at Retirement Age 60, Retirement Corpus of 10,01,80,663 Rs. as per Cell C-15, roughly~ 10.02 CR is required. This is Ultimate Outcomes.

How to reach there, needs a completely Independent Post ,not for now, may be some day in future

There are many Retirement Planner Apps available in Play Store, free to download, developed by Indian, with Indian perspectives as well, find it out & download in smart phone. Basically, all of them follow same logic in calculation that I have discussed. This is PRIMER understandings in Retirement Planning.

TAKE HOME MESSAGE

Old Age & Retired Years, preceding Death are certain in our life, whether liked or not, whether prepared for it or not.

It is no surprise at all, Bhagavat Gita, 02/27 clearly defines that

जातस्य हि ध्रुवो मृत्यु.

Death is certain for one who has been born.

Better to be SAFE than SORRY in Retired Years.

Better to be conservative than aggressive in assumptions for Retirement Corpus Calculations, for Annual Expenses, Inflation & Return on Investments.

Failure to Plan is definitely a Plan for Failure.

Retirement Corpus Calculation defines your Destination, Calculate it with shared Excel Sheets formulas & get ready for a Gracious Retirement, like M S Dhoni.