Retirement planning: Retirement planning often scares people. Especially, if it comes to retiring quickly, the matter becomes even more serious. ‘There will be so much money… how will the expenditure go… how long will I live…?’- Many such questions come to mind. But there is an easy formula to solve this confusion, 4% rule.
According to this rule, if you have so much money that 4% of its expenses are met every year, then you can retire. This means that if your annual requirement is Rs 10 lakh, then you will need 10 lakh × 25 i.e. Rs 2.5 crore. If you say easy language, then you should have 25 times the need of your need in a year.
However, the financial advisors warn to adopt a blindly on the formula of 4%. Anmol Gupta, a founder and personal financial financial planner of 7prosper, says that many ‘agar-magar’ are hidden behind this rule, which can prove to be dangerous to ignore. He recently highlighted some important things related to retirement planning in a social media post.
The role of retirement age is important
According to Gupta, 4% of the rules are more correct for those who are planning to retire around 55 to 60 years of age. This rule considers the retirement period of about 30 years as the basis. But if a person wants to retire earlier, he will need a relatively large amount, as the spending duration will be longer.
Do not ignore inflation
A general mistake during retirement planning is that people consider existing expenses as the basis. Anmol Gupta says that it is necessary to estimate future expenses keeping in mind inflation. Not doing so may lead to financial imbalance after retirement.
How much money is needed for retirement?
Now suppose you are 30 years old and you want to retire at the age of 55 years. The current monthly expenditure is ₹ 60,000 i.e. ₹ 7.2 lakhs annually. Now think, if you spend ₹ 60,000 every month today, will this expenditure be the same even after 25 years? The answer is no. This expenditure will increase according to inflation.
If the rate of inflation is 6% on an average, the expenditure will double every 12 years according to the ‘Rule of 72’, and about four times in 24-25 years. This means that your annual expenditure is ₹ 7.2 lakh now, it will reach above ₹ 14 lakh annually in the next 12 years. And after the next 12 years, it will reach above ₹ 28 lakh.
Now apply 4% rule:
₹ 28 Lakh × 25 = ₹ 7 Crore
That is, you will need around ₹ 7 crore to retire at the age of 55.
Limits of thumb rules
Gupta believes that there is a dominance of technology and artificial intelligence in the current era. In such a situation, it would not be right to depend on only thumb rules. His advice is that everyone should use an accurate retirement calculator or financial planning tools. Those who take into account important aspects like personal needs, investment returns, inflation and lifetime. With this, you can make your retirement planning better.
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