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Tata Capital > Blog > Wealth Services > How to calculate your retirement wealth gap?

Wealth Services

How to calculate your retirement wealth gap?

How to calculate your retirement wealth gap?

Retirement planning is one need that you need to start planning as early as possible. Often, people ignore this key financial goal until they are in their early 40s, then it is time to scamper around and crunch some serious numbers to assess the wealth gap towards retirement planning and take charge of the situation by arriving at a realistic number that can help you save the day. Instead, you should start investing early on and conduct the gap analysis at every juncture. During the earlier years, you can do the gap analysis every 5-8 years, but as you approach your retirement, you can do it more frequently 2-4 years and when you are just a few years away, remember to monitor your corpus and gap more closely. Here’s a guide on how to assess the retirement wealth gap:

Assess your current situation:

As a first step, you need to understand where you stand, this means that you will have to take stock of all your investments and assess the ones that can be aligned with your retirement goal. You may have made some investments as mandated or unknowingly which are a perfect fit for your retirement goal.

For example, the provident fund which is a mandatory requirement is one of the avenues which can be aligned for your retirement goal. Any other long term investment plan which does not align with any other financial goal of yours can be earmarked for retirement.

Pro Tip: Remember not to dip into these funds for any other intermediate requirement. In case of emergency, if you have dipped into the corpus, replenish it immediately.

Additional Read: Wealth managers can’t predict pandemics – but here’s what they can do

Arrive at a realistic monthly requirement to sustain a comfortable retirement:

After the above step, you need to arrive at a realistic monthly amount that will help you sustain a reasonable / desired lifestyle. The current monthly income can only be a broad cue, it may not be accurate to take the same amount as is.

For example, at this present time, you may have higher dining out or socialising expenses, which may reduce in the future. You may also be incurring tuition fees on your children’s education, which may seize after a few years. Further, remember, your medical expenses could grossly increase as you age, hence you may have to ensure that these aspects are adhered to whilst arriving at a realistic monthly number.

Pro Tip: Remember to include all fixed components with cost escalation, for example, if you are likely to live in a rented place and hire help for certain chores, the current costs may be unrealistic. You will have to factor in the cost escalation.

Ascertain the corpus requirement after adjusting for inflation for all the years till life expectancy:

Based on the monthly requirement, project the corpus required. For this, you will be using the future value which is based on the expected inflation rate, the number of years to retirement and the monthly expenses for the period between your year of retirement and life expectancy.

Remember to include the scenario where your spouse may continue to live long after you are gone. It is ideal to build a corpus that can help you sustain your retirement merely based on its post-tax returns. This ensures that your corpus remains as-is for the entire period of your life post-retirement. This corpus can continue to serve your spouse to sustain expenses after you.

However, this may not always be possible, often there may be emergencies that may require one to withdraw from this corpus. Hence, even at this stage hedging, your life and health risks are important.

Pro Tip: You must avail life cover and health cover for the longest period and at the most competent rates to bridge the gap.

Project your current investments realistically and adjudge the gap:

After having arrived at the overall corpus requirement, you will have to reduce the current investments which will grow into a certain amount at retirement. Such projection of the current corpus should be realistic.

Pro Tip: Remember to adjust for taxes and inflation whilst projecting the current investments. The difference between the two amounts will provide the wealth gap which needs to be planned for.

Additional Read: How Can You Protect Your Wealth in the Midst of an Economic Downturn?

After having arrived at the wealth gap for your retirement goal, you will have to ascertain the amount of investment required to seamlessly bridge the gap. And then, it’s time to pull up your socks and get started on building an investment plan which will effectively build the required corpus within the given time at a realistic return from investment. You can use the Retirement Planning calculator to find your own retirement gap. To get help regarding your portfolio, you can get in touch with a relationship manager at Tata Capital Wealth.

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