"Retirement is being able to have sufficient fund or income generating assets that are able to sustain your current lifestyle. It is the capability to achieve financial freedom without having to worry about money to support your needs and wants".
This is the stage in life that we consider as 100% Passive Income.
We need to consider the following data for us to compute the needed retirement fund:
- Current Personal Expenses – If we are to maintain our current lifestyle, no need to adjust this value. If you want to increase the quality of your lifestyle in the future, increase this value.
- i.e. Maintain Lifestyle = 30,000, Improved Lifestyle = 50,000
- Average Inflation rate – average inflation rate from 1995-2009 is 5.8%. We will use this value for our example
- Retirement Age – Government standard is age 65. But surely, majority of us would like to retire earlier than 65.
- Life Expectancy – This is the age wherein you will be "Taken out from the picture"
- Post-retirement interest rate – This is the interest rate of your investment instrument where your fund will be place during your retirement.
i.e. Current monthly expense = 30,000. Annual expense (PV) = 360,000
Average inflation rate(i) = 5.8%
Post-Retirement Interest rate = 2.5%
Current age = 30
Desired Retirement Age = 55
Life Expectancy = 75
Years before retirement (p) = 55-30 = 25
Using compounding interest formula:
FutureValue = 1,473,819.14
You may also use the MS Excel Function "FV" to calculate future value.
i.e. =FV(0.058,25,0,-360000,1)
Step 2: Calculate the Real Interest Rate.
During retirement, our expenses will still increase over time due to inflation. The Real Interest Rate adjusts the rate of return of your investment if inflation rate was to consider.
If we experienced a negative value on our Real Interest Rate, it means that the inflation rate is higher than the interest rate.
Step 3: Calculate the retirement fund needed to be able to sustain lifestyle from Age 55 to Age 75
The formula here is a bit complicated. We will be using the Simple Interest Amortized Loan Formula to get the retirement fund needed:
PMT = -1,473,819.14 (this should be negative)
i = -3.119% (This should be negative since inflation rate is higher than
n=Retirement Years = 75-55 = 20 Years
PV= 41,801,703.26
You may Also use the MS Excel Function "PV" to retrieve the same value.
=PV(-0.03119,20,-1473819.14,0)
The graph below shows a good illustration of your fund and expense during your retirement years:
Did it give you a headache? Which one? How to do the calculation or how to accumulate 41.8M pesos worth of retirement fund?
