# Retirement and pension

## Here’s how to figure out how much you will need in your sunset years and whether your savings will be enough. Try our retirement corpus calculator.

Print Edition: March 19, 2009

Retirement is a time to sit back and enjoy the benefits of a lifetime of work. But that depends on how well you have planned your retirement. Have you taken into account the rising cost of living while calculating your future needs? Will your savings take care of the expenses without compromising on your present lifestyle?

Here’s how to figure out how much you will need in your sunset years and whether your savings will be enough. Try our retirement corpus calculator.

 Calculating your retirement needs Parameters Example Current age (yrs) 45 Retirement age (yrs) 60 Life expectancy (yrs) 80 Expected growth in income (P.A.) 6% Current annual expense (Rs) 2,40,000 Retirement expenses 80% Savings till date 8,00,000 Return on investment (P.A.) 12% During accumulation of corpus return on investment (P.A.) 9% During distribution of corpus inflation (P.A.) 6% Inflation-adjusted returns* 2.83% Annual income at retirement age (Rs) 8,62,760 Income replacement Retirement corpus needed (Rs) 1,34,08,607 Monthly savings (Rs) 26,840 Yearly savings (Rs) 3,59,676 Expense replacement Retirement corpus needed (Rs) 71,51,257 Monthly savings (Rs) 4,713 Yearly savings (Rs) 74,368 * Inflation-adjusted return is the expected return on investment minus the inflation rate.

Calculate the costs
To calculate the cost of living when you retire, list your current expenses and estimate their cost when you retire. For this, you will need to know:
- Number of years left till you retire.
- The amount you have already saved.
- Expected rate of inflation.
- Expected return on investments.

How inflation affects expenses
Use this simple rule to see how the inflation rate affects your future spending. Suppose the current inflation rate is 3.1% and you spend Rs 5,000 per month on groceries. Then, using the Rule of 72, you can find out how many years it will take to double the cost of groceries.

72/3.1 = 23.22 (years)

In 2032, the same basket of groceries will cost you Rs 10,000. If the rate of inflation is higher, the prices will increase even more quickly.

How much you would require
70-80% of your pre-retirement income is what you need to live on comfortably after retirement.

ANNUITIES
Annuities are flexible plans that you can use to help achieve your long-term financial goals and provide you with a steady source of retirement income

Types of payment
Immediate annuity: Pay a lump-sum now, and start receiving payments now.
Deferred annuity: Save systematically over time and start receiving payments later.

Types of income
Fixed rate: No change in payment. If you get Rs 2,500 as the first payment, the sum will remain the same till the end.
Year 1 Rs 2,500
Year 5 Rs 2,500
Year 10 Rs 2,500

Variable rate:
You can opt to increase the payout every year to account for the increase in the cost of living.
Year 1 Rs 1,000
Year 3 Rs 1,200
Year 5 Rs 1,400
Year 7 Rs 1,600
Year 10 Rs 1,900

Payment options
Annuity certain: This kind of annuity is paid for a set period. For instance, if you buy an annuity for 10 years, you will get the benefit for only 10 years.
Life annuity: In this version, you get a payment through your lifetime; the payments end when you die.
Joint life annuity: Also called joint and survivor annuity, the payment is made to two individuals (usually a married couple) in whole, or in part, till both die.
Return of purchase price: You can get back the purchase price of the annuity after a specified number of years, or the survivors get the money on your death, depending on the terms.

 Have you planned your retirement?One of the biggest challenges faced by a retiree is managing the money so that it lasts for the rest of his life. Take this short quiz to find out how well-placed you are: 1. How much of your income is predictable?a. 100% b. Up to 80% c. Up to 50% d. Less than 50%2. What are the sources of your retirement income?a. Pension b. Returns from investments c. Bank deposits d. All of these3. How long will your retirement corpus last?a. Lifetime b. Five years after retirement c. 10 years after retirement d. Don’t know Key to quiz:  If you answered a. or b. to question 1, d. to question 2, and a. to the last question, you have planned your retirement well. If you have answered differently, it’s a good idea to start planning today.