Retirement is a period that every earning individual must go through after deciding to leave the job or after the job’s pre-decided tenure automatically ends. However, since the cash inflow after retirement stops, the retirees must decide on some options to spend the rest of their life. Typically, organizations prepare some plan (pension, gratuity, and/or provident fund) to aid their retirees to spend their lives. However, retirees themselves should also foresee in advance how much they require to survive after retiring. Let us know ‘How Much Need Survive Retirement State?’.
How Much Need Survive Retirement State?
There are a few strategies according to which a person can estimate retirement fund requirements at the end of his job tenure. Almost all of them depend upon the life expectancy in that geography. For example, if a person lives in a region where the average age of individuals is determined as 75 years through surveys and the retiring age is fixed by the state law or the employer to be 60 years, the person should plan for 15 years of post-retirement life and start saving accordingly. Now if the annual income is $100,000 and the person has 10 years to retire, he must estimate how much he shall need in a year to survive and start saving. For instance, if the estimated requirement is $400,000, then a person should save $40,000 a year to gather enough funds for his retirement.
There are a few ways in which a person can plan for retirement. One of the easiest but riskiest ways is to let your employers decide how much you should need after retirement. The individual has no control over the post-retirement savings in this scenario. The other way is to plan how much one should save keeping in view the potential future, plans, and risk aversion. There are several pension funds and retirement plan facilities available currently in the market. However, it is best for the retiree himself to estimate the requirements of the future and have control of life after retirement. For example, if a person seeks to travel frequently after retirement, he should not accumulate enough fixed assets in one geography and have enough cash in hand to support him on his journeys. If a person plans to settle at one location and spend a peaceful life, he should invest in fixed assets and seek to generate a stable cash flow for himself.
Retirement Fund Estimation Strategies
The 4% rule
This is undoubtedly the most well-known rule for retirement fund estimation. According to this rule, the first year’s annual income should be 4% of your total retirement savings. For the rest of the years, only inflation adjustments shall apply to the previous year’s drawn amount. For example, if the annual requirement of funds is estimated to be $50,000, then the person should save $1,250,000 as a retirement fund. This rule considers a post-retirement life of 30 years (for example, 90 years if the age of retirement is 60 years).
Age-Based Annuity Calculation
No matter how far a person is from retirement, he can estimate savings for the targeted age of retirement and life expectancy beyond that. The Key is to fulfill the annual savings target religiously. The existing age should be tabulated against the targeted retirement age, and the savings should be estimated accordingly. For example, if a person is 45 years old and he knows that retirement is 60 years, he has 15 years to save. Now let’s say that he could not save the first 5 years, he has 10 years to save for retirement now and the due amount of 5 years shall add on to the amount which is required to be saved in the rest of 10 years.
The retirement fund is a key asset for the retiree on which he depends. Timely planning and knowledge of options can prevent unnecessary inconvenience since there is normally no other source of income after retirement. Based on the plans after retirement, the retiree can either plan for savings linearly by estimating the future requirement and dividing it by the remaining time to retire, or by adopting the 4% rule which guides about considering the first year’s income as the 4% of the overall post-retirement savings.
Frequently Asked Question (FAQs)
- For how many years should I save?
This question is directly related to knowing the average age in the region and the current state of health. Though a medical professional or researcher can estimate this better, a person should save for 30 years as prescribed by the 4% rule.
- How much should I save for retirement?
It is better to chart the expenses expected post-retirement and have some idea about inflation. Then extrapolate the existing income toward retirement and find out the savings. For instance, if the expenses are estimated to be $30,000 per annum and inflation is expected to increase the expense by 5% year-on-year, then the total savings should be $2.1 million approximately keeping in view the expected post-retirement life of 30 years.