Recurring deposit calculation...
(BEFORE 60)
Say your age is 30 and started thinking about retirement plans and pensions. Though there are many options out there, but lets do some calculations by taking the safest route of saving/investing money for our retirement and which is NOT SUBJECT TO MARKET RISK i.e., Recurring Deposit or Fixed Deposit or Public Provident Fund.
Say you wish to retire at the age of 60. Thus, 30 more years to work and receive your paychecks.
Say you will live for 100 years. Thus, you need pension money for
40 X 12 = 480 months
Say you want 100,000 INR per month as a pension. Thus your bank account should have
100,000 X 40 X 12 = 4,80,00,000 (4 crores 80 lakhs)
...at the age of retirement (60)
Say you use the recurring deposit mode for saving and reaching the target of 4 crores and 80 Lakhs. So how much you should invest per month in your recurring deposit?
I used this calculator online:
http://rd-calculator.in/
Maturity Amount: 4,80,00,000
Duration(in months): 30 years X 12 = 360
Interest Rate: 8 (assumed, PPF gives 7.8% interest latest)
Compounding: Annually
=> Installment: 33,860 INR
Thus, 33,860 INR shall be saved in a recurring deposit every month to reach your target.
Achievable?
Yes or NO. But 33,860 INR is your safest investment and NOT SUBJECT TO MARKET RISK.
Do not be disheartened!
Now there is more to this calculation like:
Let's discuss decreasing interest rates of fixed deposits and recurring deposits. Worst case, it drops gradually to 3% by the time you retire (i.e., in next 30 years). 3% interest rate is more or less same as fixed deposit interest rates in USA today. Our economy is slowly moving towards USA.
Say it is decreasing by 0.16 value (not by % and not compoundly) every year. At this rate 8% interest rate today will reach close to 3% in 30 years.Then how our calculation will change, lets have a look:
Monthly Installment: 33,860
Interest Rate Today: 8
Interest Declining by: 0.16
(AFTER 60)
You will save roughly 2 crores 80 lakhs by age of 60 years
Let's calculate our pension amount now
= 2 crores 80 lakhs / (40 years X 12 months)
=> 58,390 per month will be your pension.
Looks Ok to me. But god knows what will be the value of 58K after 30 years.
But I see India becoming a strong economy in coming decades and rupee will be stronger than other currencies
Though, there is a small catch in this calculation and it is little complex.
At the age of 60, every year you will receive interest on the sum you have
= (saved - pension for that year).
= (2 crores 80 lakhs - (12 months X 58,390 pension)) * 3% interest
=> 819791.90 ~ 8.2 lakhs INR
Assumption, after 30 years interest rates will be 3% constant. Banks gives monthly payout for your fixed deposits, check the article below:
https://www.bankbazaar.com/fixed-deposit/monthly-interest-payout-fd.html
Bank will calculate your interest monthly by
=> Principle X (3% interest / 12 months)
So for first month you will receive interest on your savings:
=> ₹28,027,076.77 X (3% / 12)) = ₹70,068 (~70K)
Now, if you withdraw ₹29,932 (~30K) more along with the interest money for that month, your total pension would become 100,000 INR. Similarly for the second month repeating the same calculation, you have to withdraw ₹30,007 more plus interest earned for that month to make it 100,000 INR.
Below is the chart, which shows how your pension scheme would work for first 5 months:
...and so on, you can continue doing this for rest of your life till 100. Even then you will save ₹4,06,961 (4 lakhs 6 thousands). Amazing right!!!
** But care to be taken I have made lot of assumptions above. May be some are right, some are not.
I have not considered the inflation part. This part is confusing for me as well.
Disclaimer: I am no financial expert, I am just an 30+ engineer and started taking care of my finances and expenses. So if you are OK with it, lets continue.
(BEFORE 60...lets be younger again)
Though inflation works against us. But remember you will grow elder and wiser and gain experience in your field and with that, your monthly income would also increase yearly.
Its up to you how much % of income you wish to contribute towards your pension. Also, its your decision how much more you contribute each year in your pension fund. Another assumption, I promise it will be my last.Let's say you contribute 3% more in your pension fund yearly.
Then let us see how our calculation will change here after:
Monthly Installment ₹33,860
Interest Rate Today 8%
Interest Declining by 0.16%
Raise Installment per year by: 3%
Now Do you see the difference?
Also notice a VERY IMPORTANT thing, in the chart:
Anyways, now you would be interested to know how much pension one shall expect every month with this new number (₹3,93,49,610). Well you can calculate that by yourself.
Or make use of this excel sheet template:
https://docs.google.com/spreadsheets/d/1M45VyGbfLbr5wVd2vRvUeYGyHSlKFxycxqWCWLtnIRg/edit#gid=0
One problem you cannot edit it. If you need this file please drop me your email id below in the comment. I will email you with the file.
Let me summarize all my assumptions:
(before 60)
- Your monthly installment: ₹33,860
- Interest Rate Today: 8%
- Interest Declining by: 0.16 value (not %)
- Raise Installment per year by: 3%
(after 60)
- Assumed Interest Rate (Yearly): 3%
- Your Desired Pension Amount: ₹1,00,000
All these assumptions are changeable in the excel sheet I provided. You can play around and decide:
- How much pension you shall expect monthly?
AND
- How much you should contribute towards your pension fund?
There could be many things which I have not considered. Like I said I am no financial expert. But I love these numbers on my excel sheet.
Good bye!
(BEFORE 60)
Say your age is 30 and started thinking about retirement plans and pensions. Though there are many options out there, but lets do some calculations by taking the safest route of saving/investing money for our retirement and which is NOT SUBJECT TO MARKET RISK i.e., Recurring Deposit or Fixed Deposit or Public Provident Fund.
Say you wish to retire at the age of 60. Thus, 30 more years to work and receive your paychecks.
Say you will live for 100 years. Thus, you need pension money for
40 X 12 = 480 months
Say you want 100,000 INR per month as a pension. Thus your bank account should have
100,000 X 40 X 12 = 4,80,00,000 (4 crores 80 lakhs)
...at the age of retirement (60)
Say you use the recurring deposit mode for saving and reaching the target of 4 crores and 80 Lakhs. So how much you should invest per month in your recurring deposit?
I used this calculator online:
http://rd-calculator.in/
Maturity Amount: 4,80,00,000
Duration(in months): 30 years X 12 = 360
Interest Rate: 8 (assumed, PPF gives 7.8% interest latest)
Compounding: Annually
=> Installment: 33,860 INR
Thus, 33,860 INR shall be saved in a recurring deposit every month to reach your target.
Achievable?
Yes or NO. But 33,860 INR is your safest investment and NOT SUBJECT TO MARKET RISK.
Do not be disheartened!
Now there is more to this calculation like:
- Inflation which is increasing at 7% rate (courtesy Google "inflation rate in India")
- Decreasing recurring and fixed deposit interest rates (also PPF)
Let's discuss decreasing interest rates of fixed deposits and recurring deposits. Worst case, it drops gradually to 3% by the time you retire (i.e., in next 30 years). 3% interest rate is more or less same as fixed deposit interest rates in USA today. Our economy is slowly moving towards USA.
Say it is decreasing by 0.16 value (not by % and not compoundly) every year. At this rate 8% interest rate today will reach close to 3% in 30 years.Then how our calculation will change, lets have a look:
Monthly Installment: 33,860
Interest Rate Today: 8
Interest Declining by: 0.16
(AFTER 60)
You will save roughly 2 crores 80 lakhs by age of 60 years
Let's calculate our pension amount now
= 2 crores 80 lakhs / (40 years X 12 months)
=> 58,390 per month will be your pension.
Looks Ok to me. But god knows what will be the value of 58K after 30 years.
But I see India becoming a strong economy in coming decades and rupee will be stronger than other currencies
Though, there is a small catch in this calculation and it is little complex.
At the age of 60, every year you will receive interest on the sum you have
= (saved - pension for that year).
= (2 crores 80 lakhs - (12 months X 58,390 pension)) * 3% interest
=> 819791.90 ~ 8.2 lakhs INR
Assumption, after 30 years interest rates will be 3% constant. Banks gives monthly payout for your fixed deposits, check the article below:
https://www.bankbazaar.com/fixed-deposit/monthly-interest-payout-fd.html
Bank will calculate your interest monthly by
=> Principle X (3% interest / 12 months)
So for first month you will receive interest on your savings:
=> ₹28,027,076.77 X (3% / 12)) = ₹70,068 (~70K)
Now, if you withdraw ₹29,932 (~30K) more along with the interest money for that month, your total pension would become 100,000 INR. Similarly for the second month repeating the same calculation, you have to withdraw ₹30,007 more plus interest earned for that month to make it 100,000 INR.
Below is the chart, which shows how your pension scheme would work for first 5 months:
...and so on, you can continue doing this for rest of your life till 100. Even then you will save ₹4,06,961 (4 lakhs 6 thousands). Amazing right!!!
** But care to be taken I have made lot of assumptions above. May be some are right, some are not.
I have not considered the inflation part. This part is confusing for me as well.
Disclaimer: I am no financial expert, I am just an 30+ engineer and started taking care of my finances and expenses. So if you are OK with it, lets continue.
(BEFORE 60...lets be younger again)
Though inflation works against us. But remember you will grow elder and wiser and gain experience in your field and with that, your monthly income would also increase yearly.
Its up to you how much % of income you wish to contribute towards your pension. Also, its your decision how much more you contribute each year in your pension fund. Another assumption, I promise it will be my last.Let's say you contribute 3% more in your pension fund yearly.
Then let us see how our calculation will change here after:
Monthly Installment ₹33,860
Interest Rate Today 8%
Interest Declining by 0.16%
Raise Installment per year by: 3%
Now Do you see the difference?
- If you keep your monthly/annual saving same for 30 years, then you make: ₹2,80,27,077
- If you raise your savings ONLY by 3% yearly, then you make: ₹3,93,49,610
- Freaking 1 crore difference.
Also notice a VERY IMPORTANT thing, in the chart:
- As late as you start saving for your pension, you will bear losses exponentially.
- If you start at 30, you make: 3 crores 93 lakhs
- If you start at 35, you make: 2 crores 89 lakhs
- Again, difference of 1 crore
Anyways, now you would be interested to know how much pension one shall expect every month with this new number (₹3,93,49,610). Well you can calculate that by yourself.
Or make use of this excel sheet template:
https://docs.google.com/spreadsheets/d/1M45VyGbfLbr5wVd2vRvUeYGyHSlKFxycxqWCWLtnIRg/edit#gid=0
One problem you cannot edit it. If you need this file please drop me your email id below in the comment. I will email you with the file.
Let me summarize all my assumptions:
(before 60)
- Your monthly installment: ₹33,860
- Interest Rate Today: 8%
- Interest Declining by: 0.16 value (not %)
- Raise Installment per year by: 3%
(after 60)
- Assumed Interest Rate (Yearly): 3%
- Your Desired Pension Amount: ₹1,00,000
All these assumptions are changeable in the excel sheet I provided. You can play around and decide:
- How much pension you shall expect monthly?
AND
- How much you should contribute towards your pension fund?
There could be many things which I have not considered. Like I said I am no financial expert. But I love these numbers on my excel sheet.
Good bye!
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