Online Retirement Planning Calculator – Where Does it Go Wrong?

In this modern age of science and technology, online retirement planning calculator has become extremely popular in India.

Retirement planning calculator is considered convenient as one just has to enter basic information such as age, income, and expenses to determine the required retirement corpus.

As far availability is concerned, there are hundreds of online retirement planning calculators. Besides that, the results produced by these so-called retirement planning calculators are considered to be highly accurate.

But if everything is so perfect, where does retirement planning calculator go wrong?

Should you blindly trust the results produced by the retirement planning calculators?

The answer is clearly ‘NO’ as it’s very important to make a well-organized investment plan in order to secure your future and living without being dependent on anyone.

To make things simpler for you, let me start with a simple example.

I recently participated in a discussion on Asan Ideas for Wealth (AIFW) where one of the members, Aditya Kothari raised the following query.

But before moving on to the query, those who do not know about AIFW, it seems to be the best and most active personal finance literacy group on Facebook.

If you have not joined the group till now, you can become a member by clicking on the given link.

https://www.facebook.com/groups/asanideasforwealth/

The query raised by Aditya Kothari was as follows:

Need help from Finacial advisors w.r.t. below case:

Current Age	40 years
Age of Retirement	50 years
Monthly Expenses	INR 50,000
Current Assets	INR 30,00,000
Debts/Loans	NIL

How much monthly investment is required in a 10-year span to be able to generate a monthly income of Rs.50000/- for a minimum of 35 years (from 50-85 years) or a maximum of 40 years (50-90 years)?

I very well understand that, at the age of 50, some portion of the investments would be required for reinvestment for the generation of future income, so kindly give suggestions taking the above point into consideration.

Requesting specific inputs/revert on the query above!

Based on the information given above, the calculations will go like this.

There are 3 assumptions that I’m taking into consideration from my side

Inflation -6%
Returns during accumulation phase i.e. for next 10 years – 9% (assuming a mix of equity and debt)
Returns during withdrawal phase – 1% above inflation

Case I

Corpus and Monthly Investment required for Life Expectancy of 85 Years

Current Age	40 years
Age Of Retirement	50 years
Life Expectancy	85 years
Monthly Expenses	INR 50,000
Current Assets	INR 30,00,000
Debts/Loans	NIL
Rate Of Inflation	6%
Returns During Accumulation Phase	9%
Returns During Withdrawal Phase	1% above inflation (e.g. 7%)

Value of 50,000 after 10 years, on retirement at 6% inflation would be 90,000

The corpus required would be 3.2 Crore in this case.

Current assets of 30 Lakhs will create around 71 Lakhs in 10 years assuming returns of 9%.

So, the net requirement is 249 Lakhs.

To generate this 249 Lakhs in the next 10 years, assuming returns of 9%, a monthly investment of 1.32 Lakhs is required.

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Case II

Corpus and Monthly Investment required for Life Expectancy of 90 Years

Current Age	40 years
Age of Retirement	50 years
Life Expectancy	90 years
Monthly Expenses	INR 50,000
Current Assets	INR 30,00,000
Debts/Loans	NIL
Rate Of Inflation	6%
Returns During Accumulation Phase	9%
Returns During Withdrawl Phase	1% above inflation (e.g. 7%)

Value of 50,000 after 10 years, on retirement at 6% inflation would be 90,000

The corpus required would be 3.6 Crores in this case.

Current assets of 30 Lakhs will create around 71 Lakhs in 10 years assuming returns of 9%.

So, the net requirement is 289 Lakhs.

To generate this 289 Lakhs in the next 10 years, assuming returns of 9%, a monthly investment of 1.53 Lakhs is required.

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Where does Online Retirement Planning Calculator in India go Wrong?

Now, coming back to the question, where do online retirement planning calculators in India go wrong?

If you search Google for retirement planning calculator, the first result that comes at the top is ‘Standard chartered retirement calculator’.

It asks you to input basic data such as age, retirement age, life expectancy, inflation rate and rate of returns on your investments.

With the same values mentioned above, it gives the following results for life expectancy of age 85.

Corpus Required- 2.6 Crores

Monthly Investments required – 92,000

Why such a huge difference? We had calculated the corpus required as 3.2 Crores and monthly investment of 1.32 Lakhs.

Here is the screen shot for your reference.

Returns during Accumulation and Withdrawal Phase

The reason for the huge difference is very simple. The calculator is assuming that you will get the same rate of returns during the accumulation phase and withdrawal phase.

Let me explain these 2 terms so that you can understand in a better manner.

Accumulation Phase -The Accumulation phase is a period in which you invest some amount of money either in a lump sum or monthly/ quarterly/ half yearly/yearly modes as per your requirements in order to generate the needed amount of corpus.

Withdrawal Phase – On the other hand, the withdrawal phase is the phase in which you start withdrawing money either in a lump sum or monthly/ quarterly/ half yearly/yearly modes to generate the required income.

While you are in the accumulation phase, you can definitely take some risks and generate the returns. However, the same is not true for the withdrawal phase as you need to remain on the safer side so as to generate your income.

Moreover, in the example given above, expecting returns of 9% after retirement (withdrawal phase) seems next to impossible. You can think of generating 7% i.e. 1% above inflation but 3% returns above inflation would be an extremely difficult task. To generate 9% returns after retirement, your equity exposure would always be high which should not be the case as the necessity of generating those much returns would always keep you stressed.

This is the first evident flaw in retirement calculators. Nonetheless, there’re also other retirement plan calculators which ask for the returns during the accumulation phase as well as the withdrawal phase.

Spouse Age

No calculator, trust me, no retirement calculator asks for the age of your spouse. In fact, it’s quite surprising how the age of your spouse makes a difference in this case. I put the same question in front of Aditya. He replied that his spouse is 4 years younger than him and gave the following information.

Current Age	40 years
Current Age Of Spouse	36 years
Age Of Retirement	50 years
Life Expectancy	85/90 years
Monthly Expenses	INR 50,000
Current Assets	INR 30,00,000
Debts/Loans	NIL
Rate Of Inflation	6%
Returns During Accumulation Phase	9%
Returns During Withdrawl Phase	1% above inflation (e.g. 7%)

Corpus Required a Retirement for life expectancy 85 Years/ 90 Years – 3.5 Crores/ 3.8 Crores

Current assets of 30 Lakhs will create around 71 Lakhs in 10 years assuming returns of 9%.

Net Corpus Required for Retirement assuming life expectancy 85 Years/ 90 Years – 279 Lakhs/ 309 Lakhs

Monthly Investment Required – 1.47 Lakhs/ 1.63 Lakhs.

So your corpus requirement is increased by 30 Lakhs if your wife is 4 years younger than you. This inference is based on the assumption that both will live up to 85 years.

Now keep everything else aside and imagine a situation, where your spouse is 10 years younger than you.

You’ll come across another flaw which needs to be addressed in most of the retirement calculators available online. You may argue that

There is no guarantee that both husband and wife will live up to 85 years.
The expenses will reduce if one of the spouses is not there.

All reasons are valid, but when we have the required time and money to make the investment, why not do a proper retirement planning. Another possibility could be that one of the spouses survives for more than 85 years.

Let me clarify one thing before proceeding towards the end. I’m not saying that my calculator is right and other ones available on the internet are wrong. The entire calculations are based on the assumptions and that’s why one can never be fully sure about the results. Nevertheless, when we are making an assumption, it’s very essential to take all the aspects into consideration.

In this article, you can see that I have not taken tax into consideration for calculating the retirement corpus. You can make your own assumptions by increasing the corpus by 10%, 20%, 30% or whatever suits you. However, you must keep in mind that it’s extremely important to have an efficient investment plan to build the required corpus.

Also, If you are planning to use retirement planning calculator available on different websites, ensure that you utilize them cautiously.