Lesson Personal Finance: Retirement Planning and Calculation of Retirement Income

Many people ignore the importance of retirement planning or realize it only when it is too late. The importance of the planning magnifies due the inflation factor in the economy. At a moderate 3% inflation, the cost of living doubles every 24 years. Thus if you estimate your annual need to be $100,000 today, it will be over $200,000 after 25 years. Add to this the increased expenditure due to medical cost and health insurance etc. Imagine this amount (and growing) to be spent every year after retirement for 15-30 years. If realized too late, you may not be able to save that much money in the short span of time which is remaining.

To calculate the amount of savings you need to make every year in order to live comfortably after retirement, follow the steps mentioned below:

1. Estimate your annual income at the time of retirement. For this first calculate the number of years remaining to retirement and the likelihood of remaining in a particular job. Calculate the terminal income using the expected growth in your income. For this you may utilize the compound interest calculator here.

2. Estimate your annual requirement post retirement. Usually this lies between 65% to 100% of your terminal income.

3. Calculate the annual retirement and social security benefits you will utilize after retirement. Subtract these benefits from the annual requirement calculated above.

4. With an estimate of inflation rate, calculate the amount of money you would need at time of retirement to provide the calculated annual income. For this you may utilize the retirement calculator here. If you are giving annual requirement as of date of retirement, enter the parameters for date of retirement as '0'. Otherwise, enter the requirement as of today. The calculator will incorporate the inflation automatically.

The calculator will also give you the amount of money you will need to save every year in order to achieve the desired post-retirement income.