By elmads

Before we move forward, you can download my spreadsheet for free on the link provided below.

If you prefer audio contents than written words, click on the link below for the audio version of this blog.

Audio Blog 1/2 – The Inflation Adjusted Retirement Calculator

Introduction

Investing our money is important to accumulate wealth, but money alone as the end goal mustn’t be our frame of mind. Money without purpose is money without value, an empty shell. This is why knowing what are our financial goals are important, as this gives us the drive and purpose for that tool of exchange.

For most people, when they say investing, the notion of a retirement fund immediately comes into their mind. They’re not wrong, because the money we invest today is not ours anymore, but for our future selves. With that in mind, there’s actually a question and a problem that arises with retirement planning. And that is how much do we actually need? is it $500,000? a million dollars or more? I know we could just seek professional financial advisors for this, to guide us and do the financial computations for us instead.

Nevertheless, there are some people who want to be hands on with their finances, to have the insights, the ideas and skills to control their money, just like myself. This is why I dug deeper and made previous blogs about retirement planning and the rule of 300 before. I’ve discussed in those blogs of mine, the things we need to consider and how to project how much we will need upon retirement. Here are the links for the said blogs – “RETIREMENT PLANNING FOR MILLENNIALS AND GENZ” & “THE RULE OF 300”.

Moving forward, maybe you’re thinking, if I made a blog already about retirement, then why bother to make one again? well, this blog is a calculator, where you put in your desired data, then it will automatically compute how much you will need to invest to attain your retirement goals based on your CURRENT monthly spending or PROJECTED monthly spending. I just recently found out and learned the mathematical computation for it. Yep, unfortunately mathematics is involved. Don’t worry it’s not complex because I’ve made a spreadsheet for it, which I’ll be sharing to everyone.

This blog explains each row and column in the spreadsheet, so that you’ll understand the process and the inputs you need to enter.

Without further ado, I’ll now start with “How to know how much money we need to invest per month for our own retirement fund”

The Process – Our Inflation Adjusted Expenses

I’ll guide you to each step of the process for this.

For the spreadsheet I made, all the green cells are where we need to enter our own inputs.

SAMPLE CENARIO: We have Apple who is currently 30-years-old and plans to retire at age 70. She is currently married, has a child, renting a home, has a car of her own, and is employed. She’s is currently residing and working in the Philippines. She plans to invest her hard-earned money for retirement, the problem is she doesn’t know how much will her goal retirement fund be, and the amount of money she’ll need to invest per month in order to hit her required retirement fund.

Firstly, we needs to know the total amount of our monthly to yearly expenses based on our today’s lifestyle.

Yearly Expenses Cell

1.) We can have two assumptions here, first assumption; Our current Yearly Expenses Lifestyle will be the same lifestyle upon retirement. This means that whatever you always spend on today, will be the same upon your retirement. This is the easiest to use, but if you want for a bit more detailed assumption, then you could do the next one.

2.) 2^nd assumption; Projected Yearly Expenses upon Retirement. This is the estimation of what will be your yearly amount of expenses be. How to do this? let me help you by asking you these questions.

• Do you think you’ll still be paying for your children’s basic necessities of life by then?
• Do you think you’ve already fully paid your mortgage by then? if not how many years left before you’ll be able to fully pay it? estimate.
• Do you think that you’ll still have dependents as your financial responsibilities? how much do you think you will need for that (their basic needs expenses)?
• Do you still have debts to pay? car loan, business loan and other loans?
• How often you will travel per year? and how much do you think you’ll be spending for each travel?
• Your Medical Needs

If you find it hard to answer these questions, then just leave it. Just do the 1^st assumption instead. This 2^nd assumption will be really hard to do, because we’re trying to consider a lot of factors in our future based on the current data we have. Plus, the more we try to project further in the future, the more inaccurate it will be.

NOTE: You might prefer to use your monthly expenses, which is fine as long as you multiply it by 12 for you to arrive in your yearly expenses. I was actually considering to use the monthly expenses rather than the yearly expenses in my spreadsheet, but the problem with monthly expenses is that it doesn’t consider the travel expenses and special events in life kind of expenses. Why? well because majority of the people in this world don’t travel monthly and not everyone always has a special monthly occasion, these events and its expenditures are only captured by yearly expenses. Keep this in mind when you prefer doing the monthly expenses method.

Furthermore, in my blog titled “Retirement Planning – The Rule of 300”. For us to have a quick projection of how much we’ll need for retirement, we just need multiply our annual expenses to the number of years we think we will live our lives starting retirement age. This is a good quick calculation of how much money we will need, the downside with this formula is that it does not consider inflation. Remember, inflation is the increase in the monetary amount of goods and services overtime. This means that a basket of Apples today will be worth more in the future. The same is true for our money’s buying power, if your yearly expenses today is worth $12,000 which is $1,000 per month, or 420,000 Pesos annually which is 35,000 Pesos a month, after a few years that amount will definitely be higher than it is today. Inflation is not a matter of “if it will happen”, nor “when will it happen”, it is a matter of how are we able to protect ourselves from it, because inflation has been happening even before we were born into this world.

The next step will be about calculating your yearly expenses to the future while factoring inflation.

Number of Years Cell

This cell is the difference betwen your age of your planned retirement minus your age now.

For instance, Apple is currently 30-years-old and she plans to retire at 70-years-old, which she based on the expected retirement age. (I used this because this is the estimated future retirement age for millennials worldwide. It is also the projected age where millennials will be entitled for the national pension of the government.)

Formula:

Number of Years Cell = Your Age of Planned Retirement – Current Age

  = 70 y/o – 30 y/o

  = 40 years

You can now enter this in the Number of Years Cell on the spreadsheet.

NOTE: Your age of planned retirement is subjective, it is not mandatory for you to choose your country’s retirement age.

Inflation Rate Cell

This is the Rate of inflation of your country’s currency. Take note of the word “your Country’s Currency”, because that’s the currency you use to buy products and services that sustains your life. There are a lot of currencies in the world like USD, GBP, PHP, EURO, JPY, RMB and others more. So, focus on the currency that you use in your day to day living.

Going back to our example, Apple who lives in the Philippines. The currency she uses is the Philippine Peso. Apple has two choices here, either she can use the current inflation rate of the Philippines or its average inflation rate over a span of 10 years. I prefer the latter, why? because inflation rate changes rapidly every month, it can massively go up and down, but knowing the average over a long period of time will give us a better view of the country’s mean inflation rate.

Furthermore, I want a decade of the average inflation rate because it captures the changes and events that happened within that time period which can still be related to our current time. Plus, having it in a long period view gives us the trend of the currency’s inflation rate, either flat, up or down.

Maybe some of you might ask, why not use more than 10 years data? when we zoom out more than a decade, like more than 20 years back, you’ll find that the average inflation rate will be highly skewed. How come? this is because of technological advancements and economic events. Technology is deflationary, meaning it keeps high inflation at bay. Remember in the 1990s, the internet was just still at its infancy and the inflation rate during that time is much higher than what we have now. Plus there are a lot of factors that can cause inflation. Nonetheless, this still depends on your country.

Going back to the 10 year average inflation rate of your currency. We could find this percentage by just doing a google search. Just type “10 years average inflation rate of (your country and/or currency)”. For some countries you wouldn’t find a direct answer, instead you’ll need to compute for the yearly average inflation rate. When this happens, you’ll need to chat down each year’s inflation rate for the past 10 years. Add everything together, then divide it by ten to arrive into the 10 year Average Inflation rate.

As an example we’ll use the past 10 years Inflation Rate of the Philippine Peso.

As depicted above, the average inflation rate of the Philippine Peso in the from 2011- 2020 was 2.90%. As for our example, we’ll use this return for our Apple scenario.

What if I feel that the previous 10 years average inflation rate of my country is too low for me? Then you can increase it to 5% or even more if you want to, it’ll be up to you. At the end of the day, you have the freedom to play with the numbers in the spreadsheet.

Inflation Adjusted Expenses

Now, we have the four important data in each given cell, which are; Yearly Expenses, (Age of Planned Retirement – Current Age), Number of years and the Estimated Inflation Rate.

With all of it entered, my spread sheet will now get the answer for the Inflation Adjusted Expenses.

The data below are from our Apple scenario.

This means that Apple’s current yearly expenses worth 420,000 PHP, will be worth 897,844.84 PHP once she reaches 70-years-old. This is what we call the Future Yearly Expenses, Adjusted for Projected Inflation.

NOTE: if we increase our inflation rate then our adjusted inflation future expense will also go up, the reverse will also happen if we decrease the inflation rate.

If you’re wondering how I did the computation for this. It is actually through the quick computation of compound interest. Inflation same as investing, uses the power of compound interest. That’s why all great investors encourage everyone to invest, because for us to battle the compounding of inflation we must counterattack it with the compounding of investing. If you want to know more about Compound interest and its difference from simple interest, see my blog titled “Simple & Compound Interest”.

To Sum It Up

This is just the information for inflation adjusted expenses, my next blog will be the continuation for the remaining factors in the spreadsheet. The amount of money needed and the monthly amount of money we need to invest for us to achieve our computed retirement fund. See the link for my the next blog down below.

I’ll end my blog with a quote from Venita VanCaspel, a financial planner who founded a stock brokerage firm named VanCaspel & Co., Inc.

“Financial Planning is like navigation. If you know where you are and where you want to go, navigation isn’t such a great problem. It’s when you don’t know the two points that it’s difficult”.

-Venita VanCaspel

Knowledge is my Sword and Patience is my Shield,

elmads

Part 2 – The Inflation Adjusted Retirement Calculator —>

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.