Living long is also a concern and has to be addressed
carefully at younger age. The rising trend of nuclear family, advancement of
science and medical facility has forced the people to seriously think about the
same. It is also necessary to start early to benefit from the power of
compounding. At present average life of an Indian is around 66 years and is
likely to increase to 75 years in next 10 years. Still most of the people do
not plan for comfortable retirement and struggle afterwards when there is
nobody to take care. If you want to enjoy the same standard of living after
retirement, which you are enjoying today, than you must act now and start
building corpus for retirement goal. One has to start retirement planning at
earliest and has to decide his/her asset allocation depending on the retirement
age and the corpus required. It is always advisable to hire a certified financial
planner for comfortable retirement planning. The government is also concern
about this issue. NPS has been floated and PFRDA has also been formed and more
tax incentives are also included in new DTC. IRDA is also revising its stand to
increase awareness for pension plans offered by the life insurance cos.
One can easily
calculate his/her retirement need with the help of excel application without
taking help from professional. Let us take a live example to understand how to
calculate retirement need. Mr. Sachin aged 30 years working in a FMCG company
draws a yearly salary of Rs. 12 lakhs p.a. He lives in Mumbai with his wife
aged 28 years and two children’s aged 6 years and 1 year. His monthly household
expenses including conveyance, life style and education expenses are Rs.
50,000. He wants to retire at his age 60 and wants to plan till his age of 80. Now
Mr. Sachin wants to calculate his retirement need with the help of excel. So he
opened excel, selected formulas then inserted functions as shown below. Let us see
how he has calculated his retirement need and understand the same in detail.
Easy
to calculate in 3 steps with the help of excel.
Step I: Calculate yearly expenses post retirement
- Rate is the assumed inflation @ 8% p.a. till retirement.
- Nper is the number of years to retire.
- PV is the present yearly expenses
- FV (answer) of Rs.60,37,594 is the future value of yearly expense at the age of 61years. This will be his yearly expenses at the first year of his retirement.
Step II: Calculate retirement
corpus required at the time of retirement
- Rate is the inflation adjusted return in the retirement phase assuming 8% inflation rate and 9% investment rate post-retirement.
- Nper is the number of years in retirement i.e. till life expectancy.
- PMT is the yearly expenses in retirement period as calculated in step I.
- Type is taken as 1 since the money will be required in the beginning of retirement.
- PV (answer) is Rs.11,07,43,907 is retirement corpus required at the time of retirement. So Sachin has to start his investment in such a way that he can build corpus of 11 crores in 30 years.
Step III: Calculate monthly
investment required to accumulate retirement corpus.
- Rate of return is the assumed @ 15% p.a during earning phase assuming 100% investment equity through MF route. Equity is recommended as his goal is very long term.
- Nper is the number of years to retire i.e. earning phase.
- FV is the corpus required on retirement as calculated in step II.
- PMT (answer) is Rs.16,000, is the monthly investment required from today for accumulating the retirement corpus for next 30 years.
- Rate is divided by 12 and Nper is multiplied by 12 to calculate monthly investment required.
Sachin has easily calculated his retirement need and you also can do
that. So why are you waiting, open your excel and do the exercise to secure
your retirement life. It is advisable to invest in equity schemes of mutual
funds to build the retirement corpus as goal is very long term. Do not invest
in insurance or pension funds for building retirement corpus. PPF/EPF is the
best debt investments for retirement but in that case your monthly investment
will go up as the rate of interest is 8.80% and 8.60% respectively compared to 15% return assumed in above example. It is
also advisable to review and rebalance your equity portfolio periodically.
Article first appeared at myiris.com on 22nd May'2012. below is the link.
