How to calculate how much you should invest for your retirement!

How to calculate how much you should invest for your retirement!

Many people plan for the financial aspects of retirement but there is much more to consider. It’s never too early to start thinking how you want to live during your golden years, post-retirement. Not having enough money for retirement is a problem that plagues many. You must have heard plenty of lame one-liners and empty tokens of advice: Save 15% of your income to retire comfortably; save two grand per month to retire a millionaire; save one crore to retire comfortably; plan to withdraw 4% annually in retirement. Financial advice isn’t helpful if all you get are platitudes and generalizations. Too often, experts toss around figures about how much you need to save and invest, without considering your long-term personal financial goals.

The elements of your investing style – your concerns, considerations, circumstances, habits, and risk tolerance – are uniquely your own. And they always will be. It’s up to you, then, to see beyond the clichés and generalizations and decide the best moves for your financial future.

There are certain assumptions that are needed to be made in order to ascertain the amount which you need to invest for your retirement.

Quick steps to calculate how much money you will need for retirement!

How Long Must My Money Last In Retirement?

Roughly half the people will live less than the average and half the people will live longer than the average (and your goal is to end up in the second half). Today there is a 60 percent chance that one member of a couple at age 60 will make it to 90 or beyond, and this number is growing. Obviously, that is much older than the averages would indicate requiring much greater retirement savings. Therefore, this is an important assumption to make while calculating how much do you need to invest for your future.

What Is A Reasonable Estimate For Inflation During Retirement?


Inflation is a required component of every estimate for how much money you need to retire and potentially the biggest risk to your retirement security. Small changes in inflation that seem benign can cause dramatic changes in how much money you need to retire because the difference compounds making it multiplicative. You can use free retirement calculators available that allows you to conveniently vary individual assumptions while keeping the others constant. Try varying inflation between 3% to 7% while also varying longevity assumptions to provide for at least one spouse reaching age 95. It is a worthwhile exercise that might just surprise you by how much it changes the amount of money you need to retire.

Is 4/5th Of Current Spending Really Enough Money To Retire?



Some expenses will drop during retirement like commuting costs, business clothes, not to mention your retirement savings contributions, but other expenses are just as likely to increase. There is no evidence supporting retirement spending decreasing with aging; however, this benefit is largely offset by rising medical expenses, prescription drug costs, and inflation. You need to formulate your own retirement budget based on your personal plan for retirement. Some people will spend less and others will spend more than they did during their working years, but blindly assuming 4/5th of pre-retirement income as being enough, is not enough.

How Much Will My Savings Grow During Retirement?



Like the inflation assumption, the return-on-investment assumption is particularly important to how much savings you need to retire because the effect is compounded. Your retirement security is dependent on how your portfolio will perform during the next 15 years.Balancing an investment portfolio requires analysis and selection of securities so that the portfolio as a whole is not significantly affected by major market moves. For example, in a perfectly balanced portfolio, a major move either up or down by certain securities would be offset by a similar move of other securities in the opposite direction. As a consequence, the portfolio value would not significantly change in response to those moves but would continue to grow on a gradual basis.

Planning for retirement involves tradeoffs. The amount of retirement capital you need will depend on many factors including when you start investing, when you want to retire and your income expectations. But starting to save early and the magic of compounding sure makes a big difference.

Leave a Reply