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Three Simple Retirement Planning Guide
The amount you need to save will depend on the retirement
lifestyle you have in mind and the income that you are earning
currently. There are three steps in retirement planning guide.
Step One: What’s your monthly retirement income?
First decide how much you think you will need every month
to retire comfortably. For example, you may think that if you were to
retire today you would need $2,500 per month. But you are only 45 years
old and your retirement is still another 20 years away. Because of
inflation, you will need more than $2,500 a month in 20 years time to
spend on the same things you are used today. Assuming an average
inflation rate of four per cent per annum, you will need $5,477 per
month in 20 years time, so that you still have the same purchasing power
as $2,500 today. The higher the rate of inflation, the greater the sum
needed per month to give you the same purchasing power as today.
Step Two: Required lump sum
From previous assumption of four per cent inflation rate,
you will need $5,477 per month or $65,733 per year. The next stage is to
calculate the lump sum required to generate $65,733 for the rest of your
life. The interest or return on your investment will determine the lump
sum required to earn you a regular income of $65,733 a year. The higher
the rate of return, the smaller lump sum needed and vice versa. For
example, if the average interest on your investment is 10 per cent per
annum, then the lump sum needed to generate that income is $657,337. But
if you managed to find investment with 20% potential return, $328,668 is
enough for your retirement planning.
Step Three: How much to save?
Along the way, let say you can earn ten per cent interest
per annum, you will have to save $11,128 a year or $927 every month for
20 years to get lump sum of $657,337. How do I get that? You can derive
the annual or monthly savings required by multiplying the lump sum
figure with the respective figure in the table. In my case, I multiply
$657,337 with 0.01693.
However, if the rate of return or your interest earnings
is 15 per cent per annum, then you would only need to save $5129 a year.
Same if you start a bit earlier, you only need to save $5826 a year for
ten per cent interest rate but 25 years of savings.
Some Precaution Though
With retirement planning, you are looking into the
future. So you will be making a lot of assumptions. Though how much you
need to save depends on the assumptions made, working through the three
steps will give you some better picture of what is expected and whether
you are on the right track to a retirement lifestyle that you want.
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