Binaifer should start at the point where it feels comfortable, that is, its current spending. He needs to list all of his expenses today, and see what he plans to do in retirement. All of them will not be repeated in retirement, such as the cost of children’s education, rent, home loan, e.t.c. However, some essential expenses that are no longer important, such as health care and domestic help, can be enormous in retirement. Other holiday expenses, such as vacations and travel, which may be less now, may be higher in retirement, given the potential ex-occupation with their job and family. The next step is for Binancer to estimate the amount she can spend on these expenses in retirement.

This will be higher than his current expenditure as prices are likely to rise in future. To estimate costs at retirement, she needs to figure out how many years she has for retirement and the rate at which she expects costs to rise each year, called the inflation rate. Binaifer should remember that the cost in different categories will not increase at the same rate. Living expenses can be expected to increase at an average rate of inflation, but medical expenses and others, such as travel and leisure, are likely to grow at a higher rate. The cost of retirement is simply calculated for each head of expenditure (Current Expenditure) x . can be done as [(1+ Rate of inflation) ^ (Years to retirement)], Binaifer doesn’t have to worry about everything being completely accurate just yet. The modifications will be visible as changes in his personal situation in a long term goal like retirement. An important first step for him is to make realistic estimates of expenses in retirement, given the current situation.

Content on this page is courtesy of Center for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.