# Retirement Planning: Calculate How Much You Need in 5 Simple Steps

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No one can work forever – which makes retirement planning an important subject whether you’re employed or running your own business.

But before you can start working towards achieving your retirement goals, you’ll need to determine the amount you actually need. To do so, you’ll have to do some basic calculations based on your current expenditure whilst factoring in inflation from now until the time you retire.

## Step 1: Annual expenditure

Let’s start off by looking at your annual expenditure now. Generally, financial experts use 80% of what your current expenditure is as a ballpark figure indicating the amount you’ll need when you retire.

So if your annual expenditure is RM100,000 now, it is assumed that you’ll need RM80,000 when you retire. Similarly, if your present expenditure is RM50,000, you’ll need RM40,000.

## Step 2: Retirement age

Now, you’ll need to ascertain the number of years you have before you hit retirement age. Assuming that you plan to retire at 55, simply subtract your current age by 55 and you’ll get this number. So if you are 45, the number of years you have before retirement is 55 – 45 = 10.

## Step 3: Factor in inflation

In this step, we’ll have to factor in inflation. This is vital because in the world today, prices are increasing every single year. A plate of Nasi Lemak that costs RM3 today, could be RM4 or more in a few years’ time! You’ll need to reflect that in your planning to avoid a drastic drop in living standard when you do retire.

Generally, an inflation of 3% is a relatively safe figure to use when it comes to retirement planning.

## Step 4: The formula

Now that you have all the above, you are ready to calculate the amount you need every year after you retire. If you’re relatively fluent with advanced math calculation, you could use the formula M = P (1 + I)n to work this out.

• M = Annual amount you’ll need upon retirement
• P = Principle amount (i.e. 80% of your current monthly expenditure, refer to Step 1 above)
• I = Inflation rate per year
• n = Number of years you have left before you retire

Using Your Computer to Calculate Annual Expenditure during Retirement

If you’re not familiar with advanced math calculation, you could also use Microsoft Excel. Just follow these steps:

1. In Cell A1, key in your principle amount (i.e. 80% of your current monthly expenditure, refer to Step 1 above)
2. In Cell B1, key in =103/100*A1
3. Move your cursor to the bottom-right corner of Cell B1 until your cursor turns to a + sign. Hold down the mouse button and start dragging your cursor to your right based on the number of years to your retirement (with Cell B1 counting as the first year). Eg: If you have 10 years left to work, drag to Cell K1. If you have 15 years left to work, drag to Cell P1.
4. Release the mouse button when you reach the final cell.
5. Voila! The numeric value on the final cell is the projected annual expenditure you’ll need upon retirement.

## Step 5: Saving

Now that you know how much your projected annual expenditure is upon retirement, you can begin working towards accumulating your retirement funds. There are two schools of thought when it comes to this:

(A) You can assume that you’ll rely solely on the funds you’ve accumulated to survive. Say the average lifespan is 75 years old, you’ll need to accumulate enough to last you for 75 – 55 (retirement age) = 20 years. So if your projected annual expenditure is RM50,000, you’ll need to have RM50,000 X 20 years = RM1,000,000.

(B) Alternatively, you could assume you’ll rely on the INTEREST generated from your retirement fund to survive. Say if you need RM50,000 per year, you’ll need to make sure you have 5% returns from your portfolio of RM1,000,000 each year. If you plan to put all your money in fixed deposits (which only has an average of 3.2% interest now), your retirement funds need to be bigger.

Of course, you could always combine the two (i.e. use a portion of the principle amount of your retirement funds whilst saving another portion for interest-generating purpose)!

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