The first brush with a retirement calculator is typically memorable, if not unforgettable(!) for pretty much all investors – including ones who do not take them seriously.

The typical responses would be,

- 'Why do I need such a huge corpus for retirement?'
- 'How do you expect me to invest this high an amount each month?'

Here is how retirement calculators go about calculating the corpus and monthly investment required.

For ease of understanding, I will consider the case of a 55 year old man, 5 years away from retirement. You can input desired values in the attached Excel sheet.

So here goes,

**Name:** Captain Haddock

**Age:** 55

**Years to retirement:** 5 (age 60)

**Year in retirement:** 5 (He does not expect to see his 65^{th} birthday, thanks to a livelong association with the bottle!)

**Current annual expenses: ** Rs. 5,00,000

**Inflation: **10%

**Net post-tax rate of return** from the Captains portfolio (equity + debt): 10%

**Annual increase in monthly investment: **10%

**Expenses in the 1 ^{st} year of retirement:**

Age 60

Expenses: **E _{1}** = Rs. 8,05,255

Let us treat this as an independent goal.

Captain Haddock must invest an amount **X _{1}** so as to have Rs. 8,05,255 after 5 years with a return of 10% and monthly investments increasing each year by 10%.

**X _{1}** = Rs. 8,333 (see image; ignore right most column)

**Expenses in the 2nd year of retirement:**

Age 61

Expenses: **E _{2}** = Rs. 8,85,781

Treating this again as an independent goal, we determine the amount of investment required, **X _{2}** (10% return, monthly investment increasing each year by 10%)7

**X _{2}** = Rs. 9,167 (see image; ignore right most column)

Similarly,

**E _{3}** = 9,74, 359 and

**X**= 10,083 (expenses for 3rd year in retirement)

_{3}**E _{4}** = 10,71,794 and

**X**= 11,092 (expenses for 4th year in retirement)

_{4}**E _{5}** = 11,78,974 and

**X**= 12,201 (expenses for 5th year in retirement)

_{5}The total *initial * monthly investment required is,

**X _{1} + X_{2} + X_{3} + X_{4} + X_{5}** = 50, 876 (see image; two red rectangles)

This investment is assumed to increase each year by 10%.

The total corpus requires is,

**E _{1} + E_{2} + E_{3} + E_{4} + E_{5}** = 49, 16,162 (see image; two blue rectangle)

This is the corpus required *if* *is not invested anywhere.*

Thus in the above scenario, each year in retirement is treated as an independent goal.

Obviously, we can do better than this.

The corpus is invested so that it earns a *net post-tax return* of 10% (for the sake of illustration!), and at the start of each year in retirement, a sum equal to the expected monthly expenses is redeemed. The rest of the corpus is allowed to grow.

For example, at the start of the first year, a sum, **E _{1}** = Rs. 8,05,255 is redeemed. At the start of the second year, a sum,

**E**= Rs. 8,85,781 is redeemed and so on.

_{2}At the end of the 5^{th} year in retirement (the duration assumed in the example), the corpus is reduced to zero (black rectangle in the image).

Using these assumptions, the corpus required is *back-calculated* to be Rs. 40,26,275 (orange rectangle in the image).

Notice that the corpus

Has reduced from 49, 16,162 to 40,26,275. Obviously because Captain Haddock now choose to invest the corpus!

Play around with this calculator with more relevant numbers to get a feel for how retirement calculators work.

**Download the Year-on-year Retirement Calculator **(a. xls file after a long time!)

Pattabiraman MurariThanks, Ashal.

Pattabiraman MurariThanks, Ashal.

RamamurthyExcuse me Pattu.

I think you are reducing the retirement planning to an arithmetic excercise.

Unfortunately our expenses do not follow a strict mathematical dicipline.

Let me talk about my own practical experience about my expenses.

Firstly the normal monthly expense is less than 10%.This again will change with a change in the life style.Secondly, my concern is about the non reccuring one time expense.

My monthly expense is about Rs 30000 per month.To certain extent this is controllable.If the expense is above Rs 30000 I can make it 30500 or 31000 by a change in lifestyle.

I keep a strict record of where my money went.I find the culprit is one time expense.

One year the onetime expense reached 3 Laks in the year.

So a retirement income has to provide funds to meet such non recurring UNAVOIDABLE expenses.Your retirement planning does not provide an answer.

Please believe me. This is NOT a criticisim.I have always admired you and will continue to admire you for all the trouble you take to educate us TOTALLY FREE.

pattuPost authorYou are spot on, Sir. This calculator does not. However, it is precisely for the one-time expenses I keep saying, one should lock the corpus in an annuity. If one uses buckets, the money will be free for use on such occasions. Beyond that not much else can be done.

RamamurthyHow can an annuity provide help in meeting one time expenses please? An annuity is a fixed sum payable at fixed intervals.The one time expenses I am talking about is a lumpsum amount, fairly big the timing of which is not known.

In my opinion the only way is through equity investments which you can encash

whenever the need arises.I know the risks involved and the efforts you have to make to keep monitoring your investments.But I feel there is no other easy way out.

pattuPost authorApologies. I meant to write "one should NOT lock the corpus in an annuity". Yes if you aggressively invest a part of the corpus in equity, the gains (if any!) can be used for such expenses.

RamamurthyExcuse me Pattu.

I think you are reducing the retirement planning to an arithmetic excercise.

Unfortunately our expenses do not follow a strict mathematical dicipline.

Let me talk about my own practical experience about my expenses.

Firstly the normal monthly expense is less than 10%.This again will change with a change in the life style.Secondly, my concern is about the non reccuring one time expense.

My monthly expense is about Rs 30000 per month.To certain extent this is controllable.If the expense is above Rs 30000 I can make it 30500 or 31000 by a change in lifestyle.

I keep a strict record of where my money went.I find the culprit is one time expense.

One year the onetime expense reached 3 Laks in the year.

So a retirement income has to provide funds to meet such non recurring UNAVOIDABLE expenses.Your retirement planning does not provide an answer.

Please believe me. This is NOT a criticisim.I have always admired you and will continue to admire you for all the trouble you take to educate us TOTALLY FREE.

pattuPost authorYou are spot on, Sir. This calculator does not. However, it is precisely for the one-time expenses I keep saying, one should lock the corpus in an annuity. If one uses buckets, the money will be free for use on such occasions. Beyond that not much else can be done.

RamamurthyHow can an annuity provide help in meeting one time expenses please? An annuity is a fixed sum payable at fixed intervals.The one time expenses I am talking about is a lumpsum amount, fairly big the timing of which is not known.

In my opinion the only way is through equity investments which you can encash

whenever the need arises.I know the risks involved and the efforts you have to make to keep monitoring your investments.But I feel there is no other easy way out.

pattuPost authorApologies. I meant to write "one should NOT lock the corpus in an annuity". Yes if you aggressively invest a part of the corpus in equity, the gains (if any!) can be used for such expenses.

RamamurthyThere is a change in my comments.I have said that my normal monthly expense is less than 10%.This does not make sense.What I mean is the annual change in the monthly expense is less than 10%.

RamamurthyThere is a change in my comments.I have said that my normal monthly expense is less than 10%.This does not make sense.What I mean is the annual change in the monthly expense is less than 10%.

Piyush KhatriSomething I like here, Mr. Haddock knows he won't survive for long.

Best of luck for the financial planners in India who is taking standard life expectancy of 75-85 and inflation of 7-8%.

pattuPost authorThanks Piyush. That is indeed an astute observation.

Piyush KhatriSomething I like here, Mr. Haddock knows he won't survive for long.

Best of luck for the financial planners in India who is taking standard life expectancy of 75-85 and inflation of 7-8%.

pattuPost authorThanks Piyush. That is indeed an astute observation.

Amarjeet Singhgreat work sir

Amarjeet Singhgreat work sir

Pattabiraman MurariThank you.

Pattabiraman MurariThank you.