248) How to Calculate for Retirement Planning

248) How to Calculate for Retirement Planning

Have you wondered how to calculate for your retirement nest egg amount?
What is the amount needed at your retirement day to spend during your retirement days.

The calculation uses the concept and formula as shown below. The value of money is worth more in the future due to interest or inflation rates. Higher interest rate and more years will make the money value increased more in the future.

These are simple steps to calculate your Monthly Savings to achieve your Retirement target.
We will be using a Time Value of Money calculator or simply named Financial Calculator.
There are many apps available online.

The example below are using screenshots from the app Financial Calculators, created by Bishinews www.fncalculator.com

Please download and start the App to follow the steps.  Click on the TVM Calculator function and you should see the TVM calculator screen as shown on below right image.

Let's take a case study of Adam.
He is currently 30 years old.
He plans to retire at 60 years old.
He wants to prepare money to live for 20 years until he is 80 years old.
He spends $24,000 per year now and wish to have same purchasing power when he is in retirement.

Assumption:
Inflation is at 4% and remains the same all the time.
During retirement, Inflation Rate is same as Investment Return Rate at 4%
He expects his current investment to give 7% per year until he retires at 60. 


There are 3 steps in the calculation.

1) Future Value of Expenses.

2) Total Expenses during Retirement.

3) Yearly Investment amount.

Step 1: Calculate Future Value of Expenses

Present Value is $24,000
Annual Rate is 4%
Period is 30 years

Click on FV button to get the Future Value.

The $24,000 expenses will be inflated to $77,842.54 after 30 years at inflation rate of 4% per annum.

Note:
1) The negative sign shows the money you get back after 30 years. It is not relevant for this calculation.
2) End mode or Begin mode gives same answer.
3) Use Annual Compounding as the Rate is Annual Compounding Rate

The app screen should look like below:

Step 2: Total Expenses during Retirement.

The $77,854.54 is only expenses for 1 year. To live for 20 years, the amount need to multiply by 20.
1 year = $77,842.54
Total = $77,842.54 x 20 years = $1,556,840

Amount needed at age 60 for 20 years Retirement = $1,556,840.

He will withdraw $77,842.54 at age 60 to spend while investing the remaining amount with a conservative return rate of 4%. 

At age 61, he will withdraw more money to match the inflation rate.

Withdrawal at age 61 = $77,842.54 (1 + 4%) = $80,956.24

He continues to withdraw additional 4% every year until he is 80 years old. Upon reaching 80 years old, all the money will be finished.

Step 3: Yearly Investment amount.

Now we need to calculate the yearly investment amount needed to achieve the Retirement Nest Egg amount. 

Future Value is $1,556,840 for the total retirement amount
Annual Rate for investment is 7%
Period is 30 years

Click on PMT button to get the yearly Payment Amount.
He needs to invest $16,481.34 every year or
$16,481.34/12 = $1,373.45 per month.

If we combine the graphs of the 3 steps, it will look like below:

This is the simple steps to calculate for your retirement amount.

Using the steps shown above, you can do your own calculation to suit your own retirement plans.

You can also download a FREE Android App that calculates the above numbers in 1 screen.
The app is only available in Google Play for Android devices. It is not available for Apple iPhone devices.

The App is UTC Tools by Sam Sim.

Get the App link here.
https://play.google.com/store/apps/details?id=com.highlevelrules.UTC_Calc_Tools

Below is how the icon in Google Play looks like.

Below is the Home Screen page 1 upon launching the App.
There are many functions and calculators for Financial Planning applications.

Below is the Home Screen page 2 upon launching the App.
Click on the Retirement Planning button, as highlighted in red.

Below is the Retirement Planning Screen.
Enter your Information to calculate the Retirement nest egg amount needed.

Below is the information entered as per case study above.

Once the data was entered, click on the Calculator button to display the calculated results as shown below.
There are 3 ways to achieve the required Retirement Target (Nest Egg Amount)
a) One single Lump Sum now
b) Yearly amount now until retirement age
c) Monthly amount now until retirement age

The amount is slightly different due to rounding off of the numbers.

Do contact and consult a Financial Consultant for more details and proper planning.

For more related articles:

107) Invest & Expenses for Retirement Plan
http://highlevelrules.blogspot.com/2017/09/invest-expenses-for-retirement-plan.html

210) Do You spend more or less during retirement?

http://highlevelrules.blogspot.com/2018/09/do-you-spend-more-or-less-during.html

200) Why Retirees Should Still Invest their Retirement Fund?

http://highlevelrules.blogspot.com/2018/08/invest-out-of-retirement-fund.html

201) Why You Should Start Your Retirement Fund Early?

http://highlevelrules.blogspot.com/2018/08/start-your-retirement-fund-early.html