Determine What Your Annual Retirement Expenses
Graduated and obtained the job of your dreams. It is now time to evaluate what you must do to look out for your retirement. You consider contacting the financial planner provided by your firm but decide to make an initial stab at the calculations first. You decide to do the calculations on Excel so that it will be easy to change your assumptions depending on what the financial planner advises. You try to be as complete as possible so that the results are useful to you and so that you will know what to ask the planner.
- Determine what your annual retirement expenses will be. Use current rupees. Show each major element. Include everything. Do not forget that for most retired people medical expenses are a major expense.
- Estimate what you believe inflation will average between now and when you retire. Determine how many years you will work between now and when you retire. Then estimate how long you will live after retirement.
- Estimate what average rate of return you believe is possible given the types of investments you plan to make.
- Determine what alternative sources of funds are available to you to offset your retirement costs. Again be conservative. Do not count on anything unless it is assured.
- Compute how much you will need each year during your retirement years. Take the amount you need in current rupees and find the future value using the inflation rate as the discount factor. Compute how large a retirement balance is needed to retire. Be sure to adjust for inflation. (Hint: This will be the present value of the stream of annual withdrawals you will need to make during your retirement years. Note that each year while you are retired the amount you need will continue to grow by the inflation rate.)
Now compute the size of your retirement nest egg by computing the present value of the annual cash plans you need during retirement.
- Compute how much must be saved every month to reach your retirement goal. This will be a future value of an annuity calculation where the future amount is the nest egg needed from part e.
- Is the above reasonable? If not, devise an uneven savings retirement plan that is more rational. That is, design a savings program where you save less at the beginning, then increase your savings amount later when you can afford it more.