What is your retirement number? How much money do you need to not work anymore? You have probably heard this question thrown around by friends a few times, or in finance movies, where the topic is often discussed.

How much money do individuals need in order to live the rest of their lives without having to work for another day? I will take you through how most people come up with that figure for themselves, so that you can decipher your own retirement figure, which will help you set goals to accomplish your dreams.

Step 1: Forecasting Monthly/Annual Expenses

To ascertain how much you need to retire, you first have to determine what your expenses will be after retirement. To make it easier to ascertain, we will look at expenses on a monthly basis.

You have to ask yourself how much you plan on spending every month after retirement. The standard of living you plan on maintaining will significantly affect your final figure. To ascertain your monthly expenses, you have to add up all your fixed expenses including utilities (electricity, water, gas etc.), fuel costs, food, dstv/Gotv, internet bills and any other expenses you will incur in a month.

After getting these costs, you add them up to get your monthly fixed costs. It is important that when you are unsure of what figure to put to any expense, you go for the higher estimate rather than a lower one, just to be on the safe side.

Now that you know your monthly expenses, you have to multiply the figure by twelve (12), in order to arrive at your annual cost. After that, you add any other expenses that are difficult to determine on a monthly basis. These costs may include school fees, hospital bills, miscellaneous expenses, rent, trips etc. By adding your expenses, you have completed the first step; getting your annual cost.

Step 2: For How Long?

The second step involves figuring out how long you plan on staying retired. While this may be tricky to determine, given that we have absolutely no control over how long we stay alive, it is possible to arrive at an estimate.

Most financial planners use mortality rates in the individual’s country or region, the mortality rate in his family and his health to make this estimate. You can easily ascertain an estimate for yourself by averaging the death age of a few close family members including your father (if passed), grandfather and close uncles.

After averaging, you have to determine the age you plan on retiring at and subtract the mortality rate of men in your family by the age you plan on going on retirement. This will give you how long you plan on spending your retirement income.

Step 3: The Role of Inflation

Since the costs we added up in the first step are based on today’s prices, we have to make room for possible changes in prices of goods in the future. The simplest way to reach that figure is to average the inflation rate over the time period from step 2.

If you are unsure of which inflation rate to use, or just to be on the safe side, you can use 20% as your average inflation rate. Recent inflation trends support using 20% annual inflation as an estimate. While 20% inflation is rather high, it is very difficult to accurately predict future inflation rates. Consequently, it is better to err on the side of caution and go with 20% inflation rate.

Step 4: Find Your Number

The fourth step is the easiest one yet, since it simply involves putting all the data collected so far into a formula. In this case, we will be using what is referred to as the “present value of annuity” formula. The formula is based on the question; “What is the value of money you need to have if you are paid XX amount every month for XX number of years, given an XX% inflation rate/rate of return. The formula is seen below:

This can also be easily calculated online with the help of an online calculator, which takes out the need to work it out manually. After inputting all the figures, you can solve for your present value of annuity. Now that you know your retirement figure, you know what you have to work towards to retire peacefully.

You can continue to adjust the amount as time goes on, by changing any of the data in steps 1 to 3. It is best to have a base case and an optimistic case scenario, where the base case has all original figures, whiles the optimistic case has figures that you increase intentionally to reflect a higher standard of living.

Saving and Investment

To achieve any financial goal, it is important to have the ability and will to save and invest. To quote Warren Buffett, “Spend what is left after saving, do not save what is left after spending”. You cannot meet any financial goal if you don’t save or invest.

While saving simply involves putting a portion of your income aside, investing is a little more involving, depending on your goals. There are hundreds of places to invest your money; from investing in private businesses or starting businesses, to buying houses (real estate), to investing in mutual funds from asset managers. It is advisable to seek professional help when you want to invest.

While the cost of seeking professional help may vary depending on the institution or amount being invested, you can get free advice from investment advisors from the investment banks you trade and/or invest with. Do not forget to invest all windfalls, because they do not affect your way of life but will help meet your goal faster.

A windfall gain or windfall profit is any type of unusually high or abundant income that is sudden and/or unexpected. These types of income are unplanned for, and could significant increase your savings and investments when utilized wisely.

By Eric Biney-Appo

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