Estimating how much money is sufficient to retire:
This article helps in estimating how much money is sufficient to retire. This is not just applicable for people who are in 60s but anyone who is planning to retire. While some details of concepts are highlighted here, you should still consider consulting competent person to avail suitable investment vehicle to suit your personal situation.
Ways of earning money:
While there are millions of work categories available, there are only 2 ways of generating money:
• You work ( trade your time, effort for money)
• money works for you
Most of the common routes focus on acquiring and sharpening skills of a person to work for money. For example engineering degree, MBA etc. helps you to acquire skill so that you can get a job and start working for money.
Making money work for you involves money generating either interest or capital appreciation and in some cases both for you. Here we make an assumption you don’t need to do any work.
Business can fall into either first or second category depending on whether you need to do any work or not.
Here we consider 2nd approach.
Estimating monthly income required:
Normally a person either makes a note of all the expense that is incurred in a month or he estimate based on their own understanding. This is a flawed approach and can lead to incorrect computation. The main reason for inaccuracy is due to cyclical nature of some of the expenses that occurs once a year and even lifetime. For the purpose of this calculation let’s ignore life time expense as it’s very specific to an individual. Best approach to estimating monthly income required is to estimate all the expense that will be required for a year and dividing it by 12.
Say we arrive at a figure of 10000$
Computing fund required:
Let’s assume you want to earn this money in a guaranteed way by keeping the money in the bank fixed deposit. Let’s also assume current rate of return is 6% for one year deposit (you can easily get this number by visiting the bank)
So principal required = (Interest X 100)/ (Rate X Time in years) = (10000X100X12)/(6X1)=2000000
If you have 2 million dollars invested in a fixed deposit, you can earn 10,000 $ every month for the rest of your life @ 6% pa. Taxes are ignored for the purpose of simplifying calculation
Is it sufficient in future?
So far everything looks neat and clean. The only problem is 10,000$ today will not be of same value as $10,000 ten years from now. It will buy you much less goods and services what it can buy you today. Remember grandfather complaining everything is expensive these days and how they used to lead a luxurious life with a modest earning? There is definitely a bit of truth in that. Inflation is the term.
In the next article I will explain how to consider inflation in calculation.
Meanwhile enjoy the following quotes on money:
-Lack of money is the root of all evil
-when I was young I thought that money was the most important thing in life; now that I am old I know that it is
-Don’t stay in bed, unless you can make money in bed
-If you can count your money, you are not very rich.
More quotes on money
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