Retirement planning is crucial as times have changed and people in general after earning handsomely in their early years look to retire early too. But this calls for a meticulous retirement planning for your golden years ahead as even then you wish to maintain the same living standard but here is where there is no regular source of income to precisely look at.
But, the task is not difficult if we somehow get to know the amount that shall be needed during the sunset years as well as how to realize the substantial sum. To your rescue, the sum needed at the time of retirement can be computed using the MS excel:-
In general here the principle of finance that will be put to use is the time value of money and we'll aim at calculating the present value of the annuity. Because after the person retires, he or she looks to generate some funds on a periodic basis say monthly, quarterly, half-yearly or yearly to meet out his different expense streams. Here rate of interest rate as well as the number of years for which the retirement will be sought is also taken into consideration.
Also, other factors that will be put to note include, rate of inflation, interest rates and time value of money.
Illustration: In an example say a 38 year women spend some Rs. 6 lakh on an annual basis, then when she retires at the age of 60 years, she taking into average inflation at the rate of 5% will need a corpus of over Rs. 17.5 lakhs for the next 25 years if it is assumed that the life expectancy will be up to 85 years.
Method or Investment to be made to reach the estimated retirement corpus
Now, that we know the amount needed, we will also have to understand how much to begin investing now such that the retirement kitty does not fall short of the funds in the future years. For this, the present value of each of the Rs. 17.5 lakh stream needs to be discounted precisely at the rate which usually is the long term yield rate on government securities. Herein you need to take into account the inflation rate, post the period of retirement.
The computation though sounds tricky can be done using the simple formula available on Microsoft Excel of Net present value or NPV. The function required to put in the interest or discount rate and the series of estimated inflows or expenses.