Sunday, December 6, 2015

How Much Money Do You Need Every Month Till Your Death?

Suppose you are X years of age today and also suppose you will live forever. In that case how much money do you need every month till your death at infinity?

A very simple financial formula provides the answer to this important question. Here are the steps that can be followed.

Suppose you want to get M amount every month to live a good life. The M should include both essential and discretionary expenses to take care of all minor and major needs and with an adequate buffer. The key here is that the definition of "good" will depend upon your perspective in life. What is good for you and someone else may vary a lot.

Assume that you will get R% return (on an annual basis), post-tax from your investments. The R% should ideally consider the appropriate tax slab and some effect of inflation. However as explained in Why Claims Of Inflation Being So Important In Financial Planning Are All Bogus? inflation is not really that critical as it is made out to be.

So how much money you need to have as the capital amount C? The amount you need to have to get M assuming R% return can be calculated using the following formula.

C = M / (R% / 12)

Yes, that's it. It's so simple a  formula one would wonder whether it is really right. It actually is. This is a case of "Perpetuity" where if you have C amount with you with return at R% you will receive M amount every month.

Or, alternatively if you have C amount as capital, at R% rate of return you can get an amount of M every month.

Where, M = C * (R% / 12)

And lo and behold, when you die at infinity, the capital C would remain intact. Of course, as many will argue that due to inflation the value of C when you die will be much lesser than  the value of C today.

If you want to be safe from inflation and also want to make sure you are in a position to make any big-ticket and major contingency expenses throughout your life having a buffer would help.

So if you have 2C amount with you and you maintain the same lifestyle pattern, you can live forever very very comfortably. And you will be financially free and a rich man in some sense.

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