Typically, the expenses required by the person on retirement is taken as a percentage of the expenses of that person just before retirement – the assumption being that one’s post retirement expenses will not include certain expenses such as transport, home loan EMI. On the other hand the expenses incurred on other heads such as health, is likely to be higher.
The process involves preparing a list of pre and post-retirement expenses, and arriving at the total expense list. The expense so calculated has to be adjusted for inflation over the period of time left to retirement to arrive at the expense in retirement. For example, Ankur has a monthly expense of Rs. 1,00,000 of which 60% is for household expenses. He is 30 years old and expects to retire at the age of 60. He expects to incur additional expenses of Rs. 10,000 pm at current prices for discretionary expenses in retirement.
Impact of Inflation Inflation is a general rise in prices of goods and services over a period of time. Over time, as the cost of goods and services increase, the value of one unit of money will go down and the same amount of money will not be able to purchase as much with that unit of money as he could have purchased earlier i.e. last month or last year. Inflation eats away the purchasing power of money over time. If inflation is seen at 8%, what is the expense that has to be met by retirement income?
|Monthly expense||Rs 1,00,000|
|Proportion of Household Expenses||60%|
|Current Household Expenses||Rs 60,000|
|Additional Discretionary Expenses||Rs 10,000|
|Total Expenses in Retirement at Current Prices||Rs 70,000|
|Retirement age||60 years|
|Years of retirement||30||60-30|
|Rate of Inflation||8%|
|Expenses at the Time of Retirement (per month)||Rs 7,04,386||70,000 X (1+8%)^30|
Now you may want to look at your current expenses, apply the above calculation to figure out what would be your expense in the first month of your retirement.