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Pension is defined as a source of income for an individual from his/her past savings when the person is no longer employed to earn a regular income. Planning for a pension corpus is the same as retirement planning. Having a stressfree retired life requires a good pension corpus, but building one is an exhaustive process that should start as soon as one starts earning. A bit of planning and disciplined investing are important to build a substantial pension corpus. However, the uncomforting part is that even after building a large retirement fund, managing it after retirement remains a continuing challenge because one does not know how long one would need the corpus. The first question is why a substantial pension corpus is needed?
After you retire, suddenly one day your regular income will drop to zero. But your expenses will not reduce by as much. In addition, as you grow older, the chances of you needing medical help will rise, and thus the expenses under this head. Also, inflation, which definitely and almost continuously makes nearly everything expensive, will limit your spending power.
So, you need a pension plan that can help you beat inflation at a time when you are not earning from regular employment. The first question is how much will you need when you retire? A definite answer is impossible to guess because it's all in the future. But if you can answer a few questions, you can arrive at a reasonably good number. So take out your financial planning note book to work on this.
First is to decide after how many years from now do you want to retire. Say it's 25 years. The next step is to calculate how much money you will need every year after your retirement. Remember, once you have retired, your expenses will come down by a certain percentage from your current expenses.
To arrive at how much you would need during your retirement days, may be you can calculate how much you would require if you retired now, and then calculate with, say an 8% annual rate of inflation, what would be the value of the same money 25 years hence. The numbers may make you uncomfortable, but that's almost the reality.
If your current expenses are say about Rs 35,000 per month and if you retire now, you would need about Rs 25,000 per month — the annual expenses then add up to Rs 3 lakh. So, to maintain at least the same level of lifestyle 25 years from now, at 8% rate of inflation, you would need about Rs 20.5 lakh per year. Now, every year from then on you would need a higher amount, again at the rate of 8%. So in the year 26, you would need about Rs 22 lakh, in the year 27 about Rs 24 lakh, and so on. If you live for 20 years after your retirement, you would need to spend a total of about Rs 9.4 crore.
The numbers might be numbing, but there is very little imagination here. It's all basic mathematics involving some reasonable guesses. So if you have to face this reality some day, it is better you start preparing for it now. Don't panic. There is a solution. Here you have to calculate how much you need to save to reach this figure.
Suppose you start saving Rs 25,000 per month, at an expected rate of return of 10% per annum, then at the end of 25th year, that is when you retire, you will have a corpus of about Rs 3.34 crore. But also consider the fact that over the years, as your income rises you will probably be able to save even more per month. Say probably five years from now you can save an additional Rs 10,000 per month. At the end of the 20th year, you will have an additional Rs 77 lakh. And so on.
Now suppose you can manage to save Rs 25,000 per month over these 25 years, but can manage a higher return of 20% per annum. You will be very comfortable when you retire because then you will have a corpus of about Rs 21.6 crore.
Even if you feel that a 20% yearly return is on the higher side and you can manage only about 15%, you will still have a corpus of Rs 8.2 crore when you retire. Hope these figures now make you comfortable.
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