Retirement Calculator: Lite Version
Now stop right there! If you don't know much about retirement planners, read this first. Then use this beginners version to get used to the kind of inputs needed. Once you are a bit comfortable you could use this Lite version and then graduate to the comprehensive version offered here.
Please note that many online versions (for example here is one by Acclipse) do not take into account all necessary features for financial independence after retirement. This is the prime motivation behind my planner.
The lite version is offered here is reasonably versatile. A couple of important features have been deliberately removed (hence the name lite) to make it user-friendly. Once you are comfortable with the setup you can graduate to the comprehensive version offered here. Please read on.
The calculator offered works in the following way:
Say you are 30 years away from retirement. You have invested 60% in equity (or any other number of your choice). The planner assumes this asset allocation up to say 3 years before retirement (again changeable) that is for 27 years. The necessary corpus needed is achieved by then. It is assumed that the corpus after deducting taxes (if any, an input) is invested in debt for 3 years (equity-free zone)leading up to retirement.
After retirement an annuity equal to the future monthly expenses is drawn from this corpus. The annuity or pension increases with inflation (an input).
It is known as lite version because I offer a comprehensive version with more options (making it more complicated!).
Let me illustrate with a detailed explanation
. Assume retirement is 30 years away with a debt-free zone of 3 years prior retirement. Assume you need a corpus of 1.1 crores. Say you invest 60% of monthly savings in equity and rest in debt instruments. Assume there is a overall loss of 10 % due to equity instruments. Reducing 1.1 crore by 10% we get ~ 1 crore (yes the loss is only from the equity component but lets reduce it from the entire corpus anyway for simplicity! Being a pessimist I overestimate loss and underestimate gain at every possibility!). Note: the loss % is set as zero in the Lite version.
From this 1 crore you need to pay taxes if you have used instruments other than EPF, PPF, NPS, equity etc. If have several instruments like endowment policies, FDs and are not sure how to handle this and suspect you may need to pay some tax, use at least 5%.
After deducting taxes you invest in a debt instrument for the remaining 3 years up to retirement (the eggy-free zone). You would get some interest and may also incur taxes on the interest. So when you choose the rate of interest in this equity-free zone keep it low, save 4% or 5%. This then represents an effective rate of interest inclusive of taxes (eg. if the interest is 8% and you fall in the 30% tax bracket the effective rate of interest = 8(1-0.3)=5.6%. If you include the 3% educational cess it will be a little less). So no more than 5% or 4% please!
Finally when you retire you take out the whole amount (corpus), invest it and remove money each month for expenses. You may need to pay taxes on this pension income. This is also accounted for by the calculator in the following way: Say your present monthly expense is Rs. 30,000. When you retire your monthly pension will be set equal to your future expenses. So to calculate monthly tax rate on your pension, we find our the monthly tax rate if your present annual income is 12X30000 =3,60,000.
Monthly tax rate = (tax/(3,60,000))/12 expressed as a %. The tax is of course assuming the present tax slabs.
If this is ~ 6% we assume when you retire you will need to pay a monthly 6% tax on your (monthly) pension. Of course the real rate could be less or more. Not much we can do about that except wait until retirement!
Now if the corpus is more than 1.1 crore the excess (called 'extra corpus' in the calculator) can be invested separately, used later or even left behind to your heirs as an estate. The cash flow chart shows the inflation-indexed (pension increases each year matches inflation) monthly pension drawn from the calculated corpus of 1.1 crore. Whew!
Wait a minute. No so fast you say! What about gratuity, leave encashment and any other lump sum amount I will get upon retirement? Can I not account for this to reduce the amount I need to invest?
In principle yes, especially when you are close to retirement when you could estimate how much you would get. However I would not recommend this since I think such lumpsum amounts should be invested either tpo account for pension later in life if your corpus runs out or you could use this as a health fund to meet health costs other than that provided by Mediclaim (you could even use this to use the Mediclaim-reimbursement instead of the cahsless facility and potentially reduced hassles). So for these reasons I think it should not be part of the calculators!