Retirement Planning Calculator
What is Retirement Planning?
Retirement planning is the preparation of finances for the period after retirement or when you stop working. Planning for retirement can start from the day you get the first salary. Inflation is known to erode the value of your money. You must invest in financial instruments that may offer the return above inflation over some time. It helps you to get the finances to enjoy a quality lifestyle in retirement.
Retirement planning must include an estimation of the expenses in retirement, determining the time horizon for your retirement, assessing the risk appetite, and tax-efficiency of your investments.
Life expectancy is on the rise. You will have to depend on children and relatives for money if you don’t invest for your retirement. You must increase your investment towards retirement when you get a hike on your salary. Don’t touch the money you have set aside for your retirement or you will lose the benefit of compounding.
What is a retirement planning calculator?
A retirement planning calculator is a utility tool that shows you the amount of money you need after retirement. It helps you to plan your investments to get the desired retirement corpus at the time of retirement. The retirement planning calculator will serve two primary purposes. It shows you the amount of money you need to maintain your current lifestyle after retirement.
The retirement planning calculator has a formula box where you select your present age, the age at which you plan to retire, the life expectancy, and the monthly income you will need in retirement. You must also choose the expected inflation rate (a good guess would be 6-7% a year), expected return on investment, and if you have set aside any amount for retirement.
The retirement planning calculator will show you the annual income you require at retirement, the additional amount you must acquire for your retirement, and the monthly savings to accumulate the retirement corpus you desire.
How does a retirement planning calculator work?
The retirement planning calculator will estimate the amount you require in retirement. It will also calculate the corpus, which will generate the income you need in retirement.
Let’s understand the working of the retirement planning calculator with an example. Suppose you require a monthly income of Rs 35,000 in retirement. You are presently 35 years old and plan to retire at 60 years of age. What is the retirement corpus you need on investing the retirement savings in a bank FD which offers an 8% yield? (Assume Inflation at 6%)
Use the formula: FV = PV (1+r)^n
FV = Future Value.
>PV= Present Value
>r= expected inflation at 6%
>n= time to retirement (60 years – 35 years) = 25 years.
FV = 35,000 (1+0.06)^25 = Rs 1,50,215.5
You convert the monthly amount into a yearly figure by multiplying by 12
You get Rs 150215.5 * 12 = Rs 18,02,586.
The annual income you require immediately after retirement is Rs 18,02,586.
We will calculate the retirement corpus to generate an annual income of Rs 18,02,586 at the start of the retirement period.
Income required in retirement = Rs 18,02,586
Retirement Period = 20 years. (Life Expectancy of 80 years – Age of Retirement of 60 years).
Rate of return on corpus = 8%
Inflation Rate = 6%
Inflation adjusted rate of return = (1+0.08)/(1+0.06) – 1
= 1.89%/12 = 0.001575.
Retirement Period in months = 240 months. (20 years *12)
PMT = Inflation adjusted monthly income at retirement = 18,02,586/12 = Rs 1,50,215.
Use an Excel Calculator to calculate the retirement corpus by using the PV function. Select Nper = 240 months and Pmt = 150215. Type = 1.
The Corpus required to generate the Annual Income of Rs 18,02,586 is Rs 3,00,48,832.
You must invest Rs 3,00,48,832 in the 60th year at a rate of return of 8% to get an annual income of Rs 18,02,586 for 20 years.
You must calculate the monthly savings to accumulate the retirement corpus of Rs 3,00,48,832 using the PMT function in Excel. You get Rs 31,262 which are the monthly savings to accumulate the requisite retirement corpus.
How to use the ClearTax Retirement Planning Calculator?
The ClearTax Retirement Planning Calculator is a handy tool that shows the annual income you need at retirement, to maintain the current lifestyle in seconds.
- You must enter the current age in years by using the slider.
- You then enter the desired retirement age and your life expectancy.
- Fill in the monthly income required in retirement along with the expected inflation rate, and the expected return on investment (Both pre and post-retirement).
- The ClearTax Retirement Planning Calculator shows you the annual income required immediately after retirement, the additional retirement funds which must be accumulated, and the monthly savings required to accumulate the fund.
Benefits of using the ClearTax Retirement Planning Calculator
- It helps you to plan your finances in the post-retirement years.
- You will have a clear picture of how much you need to save every month to meet your retirement goals.
- The ClearTax Retirement Calculator shows you the retirement corpus you need at retirement in seconds.
- The Retirement Calculator gives you an idea of the future value of your current expenses.
- The ClearTax Retirement Calculator helps you to plan for additional expenses in retirement and increase the investments right now if you find the retirement corpus to be insufficient.
FAQs on ClearTax Retirement Planning Calculator
Why does ClearTax Retirement Planning Calculator ask for the expected inflation rate?Inflation erodes the value of money with time. You must get returns above inflation in the long-term if you want to maintain your current lifestyle in retirement. You must invest in a financial instrument that can give a return above inflation based on your risk appetite. ClearTax Retirement Planning Calculator considers inflation to show the real return on your investment at retirement.
Why must you fill the life expectancy in the ClearTax Retirement Planning Calculator?The ClearTax Retirement Planning Calculator will calculate how long the retirement corpus will last after retirement. You will have to estimate your life expectancy so that the Calculator can give an accurate estimate of how long the retirement corpus will last.
Why does the ClearTax Retirement Planning Calculator ask for the monthly income in retirement years?The ClearTax Retirement Planning Calculator will calculate the retirement corpus at the time of retirement. The amount is invested to give a sufficient return on the investment so that you can maintain the current lifestyle. You must enter the monthly income required in retirement, so that the Calculator may estimate the retirement corpus to give you this amount at retirement.
Why does the ClearTax Retirement Planning Calculator ask for existing savings or investments?The ClearTax Retirement Planning Calculator considers the existing savings or investments to determine the retirement corpus. You can collect the funds for retirement at a faster rate if you have current investments.
Why is the ClearTax Retirement Planning Calculator crucial for retirement goals?The ClearTax Retirement Planning Calculator helps you to get an idea on the retirement corpus you need to maintain the current lifestyle. If your current lifestyle or retirement goals change, you must update the necessary figures so that the calculator may offer an accurate picture of the amount you need at retirement.