The correct calculated decision taken today can save one from unfortunate scenarios post retirement. Thus calculating the right amount for retirement is very important. Calculating your retirement corpus is a multi-step process and should not be done in a hurry.
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The first step in retirement planning is to start saving at the earliest. There are other factors that influence or impact your post-retirement portfolio. Here are some steps you can follow to estimate the correct retirement corpus:
Step 1: Calculate the number of years you have for your retirement
The first and important step is to work out the number of years you have for your retirement. If you plan to retire at the age of 60, then calculate the number of years you have till then. If you want to retire sooner, your post retirement life will be bigger and for this you will need to create a bigger retirement corpus with a short span of time to save. Therefore working out the number of years you have for retirement is important. For example, if your current age is 40 years, you wish to retire at the age of 60. The expected life is till 90 years. Then you can calculate your retirement corpus accordingly for the number of years post-retirement. In this case, it is 30 years of life expected post retirement or in other words, this 30 years is the difference of life expected till 90 years less age of 60 at which you plan to retire.
Step 2: Account for the inflation
Higher the inflation, the higher the cost of living is which has an impact on your savings. Inflation has an impact on your expenses and the return earned on investments. So, one must keep in mind the negative impact of inflation while planning on retirement savings. Experts suggest to keep the inflation rate from 6-8%.
Step 3: Estimate your lifestyle expenses post-retirement
One must also account for the day-to-day expenses in post-retirement life. The estimation of your expenses depends upon your lifestyle. Make a list of all expenses including monthly rent, medical expenses, grocery, vacation, and shopping.
Step 4: Selecting the right investment instrument
For individuals, who wish to start with retirement planning at an early age, the best instruments to invest would be the ones where you can expect long-term capital appreciation. You can afford to take high risks with your investments because there is a long time before retirement. If you are middle-aged and closer to retirement, you might want to reduce your risk exposure and invest in instruments that can earn you a more secure return because retirement is just around the corner.
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Step 5: Now calculate your total retirement corpus
Based on the above calculations you can now calculate the total amount you need for your retirement. You can add up some additional amount you can keep with you to get the exact expense amount.
All these factors jointly contribute to your retirement planning. Overall, the focus should be on saving as much as possible, so that you can retire when you want. Also, ensure that you never run out of money.
There are investors who make the mistake of withdrawing amounts during the building of the corpus. While at times it might become necessary to do so due to some emergency or unforeseen circumstances, but withdrawing an amount from your retirement corpus can negatively affect your retirement planning.
Therefore, if you are young, don’t hesitate. Start investing in small sums. Remember, smaller contributions made regularly, over a period of time, to a high-potential asset like equity can produce spectacular results. Needless to say, the longer you stay invested, the more you tend to benefit.
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