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How to Calculate Your Retirement Corpus?

Want to calculate retirement corpus but confused about how to? Read this blog to learn about the importance of calculating retirement corpus and why it is important.

  • 2,989 Views | Updated on: Jun 13, 2024

In this fast-paced world, the idea of retirement seems to be evolving rapidly. With uncertain economic changes, transforming social security dynamics, and increasing life expectancy, relying solely on traditional pension plans might not suffice. The retirement investment plan emerges as a beacon of hope, offering a tailored approach to building a robust financial buffer for your golden years.

A retirement investment plan can prove fruitful for you only if it can accumulate a sufficient corpus that helps you maintain the desired lifestyle post-retirement. For instance, Mr. Srikant, who retired recently, bought a retirement plan suggested by a colleague while he was still employed. He got this plan before doing complete due diligence and estimating his future needs. Now, after his retirement, the same plan is paying him a pension of ₹2000 a month, which is insufficient to support his post-retirement life. It happened because Mr. Srikant was ignorant that calculating the future corpus requirement is crucial before buying a retirement or pension plan. This blog will discuss what retirement corpus is, why it is important, and various factors that can help you efficiently estimate the corpus amount you would need in the future.

What is Retirement Corpus?

A retirement corpus, also known as a retirement fund or nest egg, refers to the total amount of money and assets that an individual or a couple sets aside and accumulates during their working years to support their financial needs after retirement. It represents the savings and investments earmarked specifically for funding their lifestyle, expenses, and other financial requirements during their non-working years.

The retirement corpus is a critical component of retirement planning, as it ensures individuals have the financial means to maintain their desired standard of living and cover essential expenses when they are no longer actively earning a regular income from employment. The primary purpose of building a retirement corpus is to achieve financial security and independence during retirement.

To create a retirement corpus, individuals typically contribute a portion of their income regularly to retirement accounts such as employer-sponsored or retirement savings plans. These contributions are often invested in various financial instruments, such as stocks, bonds, mutual funds, and other assets, with the goal of generating returns and capital appreciation over time.

Importance of Calculating Your Retirement Corpus

Calculating your retirement corpus is of utmost importance for several reasons. It involves estimating the amount of money you will need during your retirement years to cover essential expenses without relying solely on employment income.

Here are some key reasons why it is essential to calculate retirement corpus before investing:

  • Financial Security in Retirement

    Retirement is a significant life phase where you no longer have a regular income from employment. Having a well-calculated retirement corpus ensures you have the financial security to meet your expenses and live comfortably during your retirement years.

  • Longer Life Expectancy

    People are living longer due to the betterment of healthcare and improved living conditions. Calculating your retirement corpus considers the possibility of a longer life, ensuring you have enough funds to support yourself for an extended period.

  • Inflation Protection

    Inflation reduces the purchasing capacity of money over time. By calculating your retirement corpus, you can account for inflation and ensure that your savings will be enough to cover future expenses, which will likely be higher than today’s costs.

  • Early Planning and Investment

    Calculating your retirement corpus early in your career allows you to plan and invest accordingly. Starting to save and invest for retirement early gives your assets more time to grow and compound, potentially resulting in a larger retirement corpus.

  • Assessing Retirement Goals

    Calculating your retirement corpus helps you assess whether your retirement goals are realistic and achievable. If your current savings fall short, you can take steps to increase your savings rate or adjust your retirement plans accordingly.

  • Tax and Retirement Account Optimization

    Understanding the amount needed for retirement allows you to make informed decisions about contributing to tax-advantaged retirement accounts, which can optimize your tax situation and increase your retirement savings.

Factors Affecting the Retirement Corpus

Various factors can help you in the corpus estimation, without which the retirement plan may fail to support you significantly. Once the corpus is estimated, it will give you an idea of how much you need to invest during the accumulation phase so that the desired amount is available by the time the vesting stage starts.

  • Years Left in Retirement

     It refers to the number of years from starting of the retirement plan to the year of retirement and can be calculated as a difference between your current age and age at the time of retirement. The higher the number of years left for retirement, the easier it is to build a large corpus.

  •  Life Expectancy

    It refers to the number of years a person is expected to survive. This factor is crucial because the corpus is expected to serve you till you are alive.

  • Current Monthly Expenditure

    It will help you estimate the desired amount for meeting your usual expenditure post-retirement after considering the expected inflation.

  •  Inflation Rate

    With inflation, everything will get costlier year by year, and hence your retirement corpus must align with expenses that would increase manifolds by the time you retire. Also, the inflation rate during your post-retirement years must be considered for better planning.

  • Expected Return on Investment

    It is the percentage of return you expect your investment to generate since you would have to fluctuate your premium amount for the selected term, as per the expected returns.

Calculation of the Retirement Corpus

To calculate a retirement corpus, it is better to use the online retirement fund calculator to generate accurate results. It takes as input the factors such as monthly expenditure, current monthly expenses, etc., and generates the required corpus and the monthly investment. To understand how the calculator works, you can refer to the following step-wise calculation:

Monthly Expenditure At The Time Of Retirement (ME)

ME = CME * (1+r)^n

Where,

CME = current monthly expenses

r = Annual inflation during the accumulation phase

n = years before retirement

Annual Expenditure At The Time Of Retirement (AE)

AE = ME * 12

Required Corpus (C)

>C = AE*((1-((1+G)/(1+R))^N)/(R-G))

Where G = Annual inflation expected post-retirement

R = rate of return post-retirement

N = Life expectancy post-retirement

Wrapping It Up

Calculating the corpus you would require after retirement is the first step towards truly securing your retirement years. Once you know your requirement, selecting a plan that can benefit you in your later years is easier. Estimating your retirement corpus is essential for financial planning, security, and peace of mind during your retirement years. It allows you to make informed decisions about saving, investing, and spending, ensuring that you can enjoy a comfortable and financially stable retirement.

Key Takeaways

  • It is important to calculate your retirement corpus early in your career so you can start saving and investing accordingly.
  • Factors that affect your retirement corpus include your current age, life expectancy, monthly expenses, inflation rate, and expected return on investment.
  • You can use an online retirement fund calculator to help you estimate your retirement corpus.
  • Calculating your retirement corpus is essential for financial planning, security, and peace of mind during your retirement years.

FAQs

1

What are the best investment options for retirement planning for self-employed individuals?

Public Provident Funds (PPF), National Savings Certificates (NSC), National Pension System (NPS), mutual funds, and bank fixed deposits are some of the best investment options for retirement planning of self-employed individuals.



2

When should I start my retirement planning?

The earlier, the better. Your savings will have more time to grow the earlier you begin. Even if you’re young, it’s never too early to start thinking about retirement. You can start by setting some financial goals and making a plan to reach them.



3

Should I withdraw my pension as a lump sum or as an annuity plan?

It depends on your individual circumstances. If you need the money right away, then a lump sum may be the best option for you. However, if you’re looking for a steady stream of income, then an annuity plan may be a better choice. A financial counselor can help you to assess your individual needs and goals and make the best decision for you.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors