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How inflation can eat into your retirement corpus.
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Get instant notifications from Economic Times Allow Not now You can switch off notifications anytime using browser settings. NIFTY 50 11, Drag according to your convenience. An ideal retirement corpus should take care of all your postretirement expenses. But can you calculate the amount required? It involves taking into account life expectancy, interest rates, inflation and the time value of money and can be a bit tricky.
Here we explain how to use MS Excel to calculate the amount easily. The concept of time value of money states that the worth of a rupee received today is more than a rupee received at a later date because of its earning potential. The concept of time value has two elements: Compounding helps to estimate future values whereas discounting helps to estimate present values. For calculating your retirement corpus, it is the present value that matters. Let us look at an example: The present value of Rs 8 lakh works out to be Rs 3.
Given that the present value of the amount that the product promises to pay fund inflow is less than the amount invested fund outflow , the product is not profitable. In other words, the net present value of the investment product is negative. Net present value is the difference between the present value of cash inflows and present value of cash outflows.
Calculating the present value of an amount gets complicated, if the investment generates a series of payments over a period of time. To calculate the current worth of such an investment, the present value of each payment in the entire series of payments needs to be derived. Technically, one needs to find out the present value of an annuity. A year-old with current annual expense of Rs 6 lakh can calculate his annual expenditure requirements when she retires at the age of 60, based on an assumed annual inflation rate over 22 years the period after which she will retire.
The ideal retirement corpus must generate a stream of Rs It involves taking into account life expectancy, interest rates, inflation and the time value of money and can be a bit tricky. Here we explain how to use MS Excel to calculate the amount easily. The concept of time value of money states that the worth of a rupee received today is more than a rupee received at a later date because of its earning potential. The concept of time value has two elements: Compounding helps to estimate future values whereas discounting helps to estimate present values.
For calculating your retirement corpus, it is the present value that matters. Let us look at an example: The present value of Rs 8 lakh works out to be Rs 3. Given that the present value of the amount that the product promises to pay fund inflow is less than the amount invested fund outflow , the product is not profitable.
In other words, the net present value of the investment product is negative. Net present value is the difference between the present value of cash inflows and present value of cash outflows. Calculating the present value of an amount gets complicated, if the investment generates a series of payments over a period of time. To calculate the current worth of such an investment, the present value of each payment in the entire series of payments needs to be derived.
Technically, one needs to find out the present value of an annuity. A year-old with current annual expense of Rs 6 lakh can calculate his annual expenditure requirements when she retires at the age of 60, based on an assumed annual inflation rate over 22 years the period after which she will retire. The ideal retirement corpus must generate a stream of Rs Such a corpus can be arrived at by adding the present value of each stream of Rs The appropriate rate is generally the average long-term year yield on government securities.
However, if we assume postretirement inflation of 4. Choose your reason below and click on the Report button. Your portfolio mix will have a huge bearing on this number. View the discussion thread. For months, we need the equivalent of 60 years in months. Calculate years between dates. Sure Chris… will update it for 90 years… thanks for the appreciation.
Additionally, the post-retirement inflation also needs to be taken into account. NPV requires you to input the discount or interest rate and the series of expected inflows or estimated expenses.
So, in our example, the working professional will have to accumulate Rs 2. However, if we assume postretirement inflation of 4. One can play with the numbers to see how changes in inflation, discount or interest rates changes the desired corpus.