Retirement Calculator

Jul 9 07:11 2010 Rakesh Mishra Print This Article

Some retirement products like the Public Provident Fund (PPF) allow you to accumulate over the years, and return a corpus.

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Retirement is the withdrawal from your position or occupation. A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to work anymore (by illness or accident). In most countries, the idea of retirement is of recent origin, being introduced during the 19th and 20th centuries. Previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death. 

Some retirement products like the Public Provident Fund (PPF) allow you to accumulate over the years, and return a corpus. A pension product, on the other hand, takes in your regular contributions over your earning years, and then pays you regularly starting your vesting age, the age at which you intend to retire.

A retirement calculator is a device that helps to project the exact amount that an investor has to save as well as the duration to do so in order to provide for a specific level of retirement expenditure. Some retirement calculators consider a constant rate of return. This is an appropriate tool for safe investments. Other retirement calculators consider volatility and decide whether a particular plan of saving and investing for retirement will outlast the retiree’s expenditure.

The retirement calculator takes into account a number of factors while calculating the amount that an individual needs to save. This includes the present age of the individual, his/her planned retirement age, life expectancy, present retirement savings, annual/monthly retirement saving, average investment return and inflation rate. Retirement calculators consider different factors such as social security, taxes, pensions and other sources of income at the time of retirement and arrive at the saving/investment figure accordingly.

On a personal level, the rising cost of living during retirement is a serious concern to many older adults. Retirement calculator helps you to estimate how well your savings program is preparing you for retirement. A useful and straightforward calculation can be done if we assume that interest, after expenses, taxes and inflation is zero. Assume that in real (after-inflation) terms, your salary never changes during your w years of working life. During your p years of pension, you have a living standard which costs a replacement ratio R times as much as your living standard in your working life. Your working life living standard is your salary less the proportion of salary Z that you need to save. Calculations are per unit salary, e.g. assume salary =1.

Then after w years’ work, retirement age accumulated savings= wZ. To pay for pension for p years, necessary savings at retirement=Rp(1-Z)

Equate these: wZ=Rp(1-Z) and solve to give z= Rp/ (w + Rp). For example, if w=35, p=30 and R=0.65 we find that we need to save a proportion z=35.78% of our salary.

Retirement calculators generally accumulate a proportion of salary up to retirement age, as illustrated in the clickable 'nut accumulation' example on the left. This shows a straightforward case which nonetheless could be practically useful for optimistic people hoping to work for only as long as they are likely to be retired: more information about this is at retirement.

The assumptions keyed into a retirement calculator are critical. One of the most important assumptions is the assumed rate of real (after inflation) investment return.

For more information on Retirement Calculator you can visit our website

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Rakesh Mishra
Rakesh Mishra

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