Retirement is a phase for which just about every other person attempts to plan. The aim? Ensuring that after a person loses a steady stream of income, they are able to sustain themselves without any difficulties.
Retirement planning, for a lot of people, also means planning to collect funds to invest in things they have wanted to do for years. This may include travelling, learning a hobby or even buying expensive cars or bikes.
Over the past few years, systematic investment plans (SIPs) have become a popular method of long-term savings. But people sometimes find it tough to calculate their return-on-investment (ROI) from investments done in SIPs. Here’s where an SIP calculator comes in handy.
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What is an SIP?
Before using an SIP calculator, we must understand what an SIP is. It is a planned approach to planning which involves investing small amounts of money into a long-term investment plan over regular intervals, which is usually a monthly interval.
A number of investors are now using SIPs to invest in stocks and mutual funds while reducing the risk that they usually carry.
SIPs not only reduce volatility but also have a compounding effect, which helps in yielding greater returns and profits via regular investments spread over longer durations.
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How to use an SIP calculator?
- Determine the amount you can use for SIPs
The next step is deciding how much money you can use out of their monthly income to invest in SIPs. As mentioned before, the regular intervals in which a majority of people invest money in SIPs is monthly.
You must keep in mind that the amount is neither too small nor too large. Setting aside a less-than-required monthly investment amount can lead to a shortfall in the corpus you eventually have after you retire while an exorbitantly high amount can lead to difficulties in managing your current expenses.
Say you can invest ₹2,000 per month into an SIP.
- Decide how long you wish to invest for
It is also important to decide how long you wish to invest in SIPs. This usually depends on when a person begins saving through SIPs. The longer you save, the more are the returns.
Let us say you begin saving at 25 and wish to keep saving till 60. This means the duration of the SIP will be 35 years.
- Calculate the expected rate of return on investments
Enter the expected rate of return for your mutual funds. This is an important step, as different funds offer different return rates. Keep in mind that mutual fund returns are not fixed and can fluctuate based on market conditions.
For the sake of an example, let us take the expected rate of return is 12% per annum.
After all the information has been entered, the SIP calculator shows the amount you will end up investing and the expected returns you may get. Using this, you can calculate the total amount you might have to invest per month using SIPs to be able to manage expenses comfortably post retirement.
Using the above mentioned numbers, the total amount invested at the end of 35 years will be ₹8.40 lakh for a monthly investment of ₹2,000 and an expected annual rate of return of 12%. Meanwhile, the return on investment will be over ₹1.01 crore and the total value of the investment will reach over ₹1.10 crore.
- Use the retirement calculator to assess usefulness of your investments
Using a retirement calculator is a great way of defining the amount of money that a person might need to sustain themselves after they retire. Defining this basically equates to setting a goal before using an SIP calculator to understand how you can reach it.
Using a retirement calculator requires the person to have an estimate of their monthly expenses, savings, ROIs, yearly inflation rates, targeted retirement age and life expectancy ready. Having such estimates ready makes it easier to use the retirement calculator.
The result of the retirement can be compared with that of the SIP calculator to make retirement planning easier.