Retirement is one of the important factor in financial planning. The age of retirement and your preparedness can make or break your life. What I found that some are taking it right way, some are confused, some are making it more and more difficult.
So what is important in Retirement? At what age you supposed to start? How much risk to take? Let’s check. But first, some tweets.
— CFA Institute® (@CFAinstitute) June 9, 2017
There are two basic type of plans for Pension. Defined Benefit plan and defined Contribution Plan. In defined Contribution Plan, Employer is showing his contribution for employee Pension plan as Expenses. There is no asset generation. No investment is made. No amount is guaranteed.
In Defined Benefit Plan, the formula is known which is used to calculated for using pension. But if investment made by employer failed to generate such amount, employer is supposed to pay from his pocket. The reason why many analyst think this as debt on balance sheethere
So now the Question is what is basic calculation behind all this. It is based on some assumptions. Like your expected life, standard of life and the expense needed to keep. Inflation rate, time in hand from today till Retirement. Etc.
Let’s see all this with help of one example.
Your today’s monthly income is $10000. For keeping your lifestyle same, you need to spent $7545. So $2455 remained in your hand. Your retirement is 20 years from today. You don’t have any provisions made till today.
After retirement, you at least expecting same amount in hand as maybe your mortgage payment is no more needed. Travel and other expenses are not their but your medical expense are there. Grocery and other related expenses are still needed after retirement. But the price today and in future is not same. It will be different. What is expected inflation? Let’s assumed 3% PA. So today’s $10000 are in fact $18207.55. So now biggest question is what is that amount which will generate $18207.55 as monthly payment? And what is right return for calculation for this? I am sure that its more than 3% per annum.
Assume that the rate of return is not higher. It is only 10% per annum. That is 10/12 = 0.833% per month. The amount which will generate after 20 year $18207.55 as per month revenue, equivalent to today’s $10000, is $1886750.42. Now for achieving this target you need to invest in RIGHT asset with RIGHT allocation from today. You have $2455 in hand. Again assume that you have at least Emergency fund in your hand. So the whole $2455 you can invest. That rate of return is nearly 10%. Per month return is 0.8410% ( calculation and assumption here used are random. Pls talk with FINANCIAL ADVISOR BEFORE TAKING ANY DECISION)
So as I am concluding, I found much Important Tweet, I am concluding with it
— Charles Rotblut, CFA (@CharlesRAAII) June 9, 2017
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