Cost of living at the Midpoint of Retirement

What level of income do you think will need for your retirement years?

Expert used to advice that you would need 60 percent of your preretirement income to live comfortably during retirement. But that figure has changed and comes to 70 to 90 percent due to inflation rate.

Now the question is how to calculate the cost of living for your retirement?

You can use the "Retirement Income Needs Calculator" to make an estimate how much of your annual income you will need during your retirement years.

Under "Retirement Income Needs Calculator" we require:

1. Current Annual Income after Taxes

2. Projected Percentage of Current Annual Income Needed After Retirement

3. Postretirement Living Expenses (Expected Inflation Factor)

Formula =

(Current Annual Income after Taxes) × (Projected Percentage of Current Annual Income Needed After Retirement) × (Postretirement Living Expenses/ Expected Inflation Factor)

For all this you have to follow below mentioned steps:

Step 1: Enter your Current Annual Income after Taxes..... (A)

Step 2: Enter Projected Percentage of Current Annual Income Needed after Retirement (Can take any

              percentage from 70-90)..... (B)

Step 3: Enter the estimated the number of years from now until the midpoint of your retirement years.

              To calculate this figure we have to take the help of an example:

·         Suppose you are 50 years now and expect to retire at 65 and you think that you will live more 20 years after your retirement then first you have to take the difference between Retirement Age and Current Age Which is 65 Years-50 Years = 15 Years (a)

             After this you have to take the average of the difference between your maximum living age

            (Which you think 85 or 20 more years after retirement) and your retirement age which will be:                

           

            (85 Years-65 Years= 20 Years)/2 = 10 Years (b)

            Now final result would be (a) + (b) = 15 Years + 10 Years = 25 Years….. (C)

            These 25 Years signifies that today you are 50 years old and after 25 years means 75 years would

            be your midpoint of your retirement age and your maximum living age.

   Step 4: Enter the Expected Inflation factor for postretirement living expenses

                To calculate this figure you have to take the projected inflation rate at the time of midpoint of    

                your retirement.

                Suppose at the midpoint of your retirement inflation rate would be 4% and we have already

                calculated your midpoint of your retirement age and your maximum living age in Step 3 which

                is 25 Years.

               Expected Inflation factor /Retirement Living Expense Inflation Factor=

               (1+4/100) or (1+0.04)²⁵   = 2.67….. (D)

Step 5: Calculate your Annual Cost of living at the midpoint of your retirement which would be: 

              (Current Annual Income after Taxes) × (Projected Percentage of Current Annual Income Needed

              After Retirement) × (Expected Inflation factor /Retirement Living Expense Inflation Factor)

              (A) × (B) × (D) = ….. (E)

Example for Full Calculation:

Mr. Vansukh’s Pretax Income is $100,000 Annual and his tax rate is 40%. He expects to need 80% of that amount at the time of retirement.  He is 40 years old and hopes to retire at 60 years and to live to be 80 years. He also expects inflation to average 5% annually over the relevant period.

Now we will calculate Mr. Vansukh’s annual cost of living at the midpoint of his retirement years:

Step 1:  Current Annual Income after Taxes = ($100,000 before taxes – 40% Tax) = $60,000

Step 2: Projected Percentage of Current Annual Income Needed after Retirement = 80% = 0.80

Step 3: Enter the estimated the number of years from now until the midpoint of your retirement years

             Difference between Retirement Age and Current Age = 60 years-40 years = 20 years (a)

             Average of Difference between maximum living age and retirement age=

             80 years-60 years = 20 years/2 = 10 years (b)

             Total years = (a) + (b) = 20 years + 10 years = 30 years

             These 30 years means Mr. Vansukh is 40 years old now and after 30 years means 70 years

             would be the midpoint of his retirement.

Step 4:  Expected Inflation factor /Retirement Living Expense Inflation Factor =

              (1+0.05)³⁰   = 4.32

Step 5/Final Step: Calculate Annual Cost of living at the midpoint of retirement:

             (Current Annual Income after Taxes) × (Projected Percentage of Current Annual Income Needed

             After Retirement) × (Postretirement Living Expenses/ Expected Inflation Factor)

            = $60,000 × 0.80 × 4.32

            = $2,07,360 would be the annual cost of living at midpoint of Mr. Vansukh’s retirement.

It will give you an estimate of the amount of the annual after tax income you will need to live comfortably during your retirement. Some of that money will come from social security, employer provided pension if you are eligible, but you should get a goal amount so you can decide how you are going to acquire that level of savings.

Thanks………………….