Understanding How Retirement Calculators Work

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Published: August 16, 2014 at 10:17 am

Last Updated on March 23, 2023 at 6:26 am

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.

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Photo Credit: Que Sera Sera

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 65th 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 1st year of retirement:

Age 60

Expenses: E1 = Rs. 8,05,255

Let us treat this as an independent goal.

Captain Haddock must invest an amount X1 so as to have Rs. 8,05,255 after 5 years with a return of 10% and monthly investments increasing each year by 10%.

X1 = Rs. 8,333 (see image; ignore right most column)

Expenses in the 2nd year of retirement:

Age 61

Expenses: E2 = Rs. 8,85,781

Treating this again as an independent goal, we determine the amount of investment required, X2  (10% return, monthly investment increasing each year by 10%)7

X2 = Rs. 9,167 (see image; ignore right most column)


E3 = 9,74, 359 and  X3 = 10,083 (expenses for 3rd year in retirement)

E4 = 10,71,794 and  X4 = 11,092 (expenses for 4th year in retirement)

E5 = 11,78,974 and  X5 = 12,201 (expenses for 5th year in retirement)

The total initial  monthly investment required is,

X1 + X2 + X3 + X4 + X5  = 50, 876 (see image; two red rectangles)

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

The total corpus requires is,

E1 + E2 + E3 + E4 + E5  = 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, E1 = Rs. 8,05,255 is redeemed. At the start of the second year, a sum, E2 = Rs. 8,85,781 is redeemed and so on.

At the end of the 5th 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!

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