Consider the following points
- Inflation will increase your household expenses every year ? And this increase is not a simple linear expenses. It will follow the compound interest law.
- Your corpus will also grow as per the compound interest law.
- Interest rates are corelated to inflation. When inflation goes up, so does interest rates but the increase ( decrease) in interest rates will not be the same as the increase ( or decrease ) in inflation rates. In general post tax interest rates on risk free investments will be lower than inflation.
- Inflation and interest rates do not remain constant and the best assumption that one can move is that they will move cyclically between a maximum and minimum rate. You would need to make a call on what the maximum and minimum will be for both interest and inflation. You will also have to make a call on how long would each economic cycle would be.
- Finally you will have to take a guess on how long you ( and your spouse, if you have one ) will live.
- How much money you will need in a particular year after your retirement
- How much money you must have today to fund the expenses of that specific year
- Sum this up for each year that you expect to live.
My current sheet shows that if you plan to retire TODAY and expect to live another 25 years and if your current household expenses are around Rs 90,000/month then you will have to have Rs 5.3 crores in liquid assets today if you want to maintain your current living standards.
This spreadsheet is in GoogleDocs. If you have a Google account you can copy or otherwise you can download it as an OpenOffice or Excel spreadsheet and play with it. Happy Retirement Planning.
P.S. If you spot any obvious bugs in the sheet, please let me know. Shall fix it and acknowledge the same.
PPS - Have added an extra feature in which there is a small probability that on some years there will be an additional unforeseen expenditure. [ updated June 2015]
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