Do you feel like retiring now? But don’t know if your savings are sufficient for you to provide income for remaining period. Or you are already retired and want to check how much you can withdraw monthly so you can sustain for long time. Or you are just a curious soul want to find about how long your money will last if you lose job or start on something you are passionate about. Below calculator will help you get basic idea. Based on this calculation, you will have rough idea if you still need to continue working for few more years and increase your savings or you are good to call it a day.
This article is part of my attempt to help DIY or Do It Yourself investors to come up with their own financial plan.
This Calculator will give details upto maximum 30 years as that that considered as more than sufficient for planning retirement. Start with actual figures first and see the result. Then I would suggest to play around with value of expense and see how duration increases as expense reduces. Increase or decrease rate of return and see how it changes outcome. Increase your investment value so you know how much extra you still need save to retire.
Currently I have not considered tax implications on withdrawal but if there is good response, I can add that as well. For now, add 5-10% extra in expenses as outgo towards taxes.
Now story behind this calculator. We are living in world of uncertainty due to Corona outbreak. People are afraid of losing jobs. One of my colleague Ramesh Jha called me today. He wanted to know if money he has invested is sufficient for him for next few years. And then there is Sandeep Rane who also spoke to me few days back. Frustrated with lock-down, he had sudden self realization that life is too uncertain. He would like to retire from current job. Wants to go back to his village – Kudal and find some less stressful lifestyle. He is not sure if he would earn anything there soon. So wanted to know how long his current investments would be sufficient for him.
Both Ramesh and Sandeep are different personality and reacting to same situation differently. This could be just temporary mental impact of situation. But one thing I realized people need some basic method to calculate this. So this article. Hope it helps.
Let us understand what all things that impact this calculation. Please note I have considered only financial aspect of decision. Emotional aspect, family support, preparing for next step, training oneself before we take the jump are other equally important things. I wanted to talk about same but article would be too long so will discuss that some other day. Let us now see each of them one by one. Do let me know in comments if I missed something and will try to update the article. Your contribution via suggestions will help other readers.
1. Net value of Portfolio
All of us do savings and investments. Every person is different and so the investments. Ramesh is sort of conservative person with more preference for fixed rate instruments like EPF, PPF, PPF , bank deposits etc. He has some part in NPS, Mutual Funds and so. Sandeep however has almost half of his investments in mutual funds and remaining in fixed rate instruments. When you add value of all the investments, you would get total available investment corpus.
You also need to consider real estate investments here. Living home should be excluded in calculation as that you can not sell. Sandeep was planning to leave Mumbai and settle in village. So he added likely value of house in Mumbai in his investment value. House in Kudal was excluded as that was living house post retirement. This is not always true. In your case even if you have multiple houses, you may not intend to sell any, so children can inherit. Then do not add that price in your investment value.
Ideally some part of investment should be kept aside for general family and medical emergencies that could come in future. Based on your health and family history of critical illnesses and level of medical treatment you general seek ( top hospitals or 2nd level hospitals), you should keep say 10% of investment aside for medical emergencies.
Once you get the remaining investment value, you need to subtract any outstanding loans. You should total up all the loans and ideally should plan to pay off as you take break from job. This will give you Net Value of your portfolio. This is the amount from which we should do the calculation for remaining years.
2. Lifestyle & Expenses
Ramesh and Sandeep are different families. So does yours. How everyone spends money is different. Ramesh like going out to hotels every weekend but Sandeep is more house bound. Similarly you could be person who loves travel or something else. When you are planning for retirement, check the expenses of entire year. Some expenses are monthly and some are yearly.
Ramesh spends almost a lac per year in family trips and so he needs to consider those in his expenses. Just because you are retiring, does not mean you don’t want to live the life that you had so far. Consider all the expenses you do in a year and then divide by 12 months to come up with average monthly expense.
Coming up with total expenses is not a rocket science. You need to think of all the possible expenditures that you do and make a list. I could suggest things like expenditure on household expenses, clothes, festivals, Diwali, birthdays, trips, school fees, maintenance, insurance, mediclaim premiums etc – just everything.
The way I did this is by listing down all the expenses on simple paper. Me and my better half worked together. It is always good to get family involved in such exercises. It helps them also getting mentally ready. We listed them in two columns – monthly and yearly. At the end, yearly expenses were divided by 12 (months). Then added it in monthly expense to arrive at final figure for monthly expenses.
3. Rate of return on investment
Rate of return pre retirement and post retirement should be different. As you lose security of job and monthly income, you may be become risk averse. So do check your risk profile and how would you be investing your money. If you are continuing with your current style, you would know average return that you get on your portfolio. If you feel it is better to go for less risky instruments, consider lower rate of return. Don’t try to put rate of return higher than what your risk profile suggests. It is better to stick with the asset allocation as per risk profile that you have.
Also being conservative in rate of return helps as if you get better returns, your money would last more. We don’t want reverse to happen. Getting lesser returns and money gone in few years.
Once you come up with current expenses in step two. Job is half done. Other half is to take a call on how much cost would rise over years. What costs 100 rupees today may cost 105 next year. So to get same thing next year, you will need to pay more. Generally 4-5 % inflation is what you can consider for calculation. What it means is you are considering effect of increase in prices over years and would need to withdraw 4-5 % more every year for living same lifestyle.
Tax will eat up a pie of your withdrawal. Generally annuity or any investment in retirement are less tax friendly on withdrawal. So for middle class person, we should factor around 10% of what we withdraw for income tax as a rough estimate. Actual amount of course will be based on your withdrawal amount. I am in process of updating it based on response I get. So do comment and let me know if you find calculator useful.
6 Regular Monitoring
Once you do the investments, this is most critical step. Please monitor your investment performance regularly. Investments are not like – feel it, shut it and forget it. Make sure your expenses are within the pre decided budget. Actual returns you get could be lower than expected returns or expenses could be more than planned. It is better to take some corrective measures as soon as you realize that. Yearly monitoring is what you should start with. We will talk about bucketing strategy which is commonly used during investment planning for retirement in a subsequent article