How to Calculate Your Pension Amount for Your Retirement?

Pension planning is a crucial part of your financial planning as it ensures you comfortable retirement life. Pension is essential for you to maintain the standard of living, income support for unforeseen expenses once you stop working. Hence, during your work-life stage, it’s important to plan your future financial goals prudently so that your retired life is financially secured. After retirement, even if you stop working, your responsibilities continue to exist. You would probably meet major goals of your life such as children’s education, marriage and paying off home loan dues before retirement. But, you still need regular income to match up your standard of living, for health and some for your hobbies and vacations. Pension planning helps you know how much money you would need to have a prosperous and comfortable retirement life. Pension calculator helps you through the process of planning. In this article, let’s learn more about pension calculator.

Pension plan calculator

Pension plan calculator is an effective online tool that helps you figure out how much amount you need to save for your retirement life. You can know a tentative pension by using pension plan calculator. In India, a basic retirement calculator would require following details to calculate your tentative pension.

  • Personal details:

    Details include your name, date of birth, expected retirement age, risk appetite and preferred lifestyle after retirement

  • Finance details:

    Details include your current income and expenses, money saved for retirement till date and how much can you save each month.

  • Savings details:

    Details include money already saved for investment, various types of financial instruments you are invested in and your preferred investment tools for long-term.

    Once you input your details into the online retirement planning calculator, the calculator will assess your retirement needs and provide you with the result that illustrates the amount that you need to save monthly for reaching your retirement goals.

    You can also edit the details that have been entered if there are any changes and the result will be given based on your risk profile and pension requirements.

Benefits of pension plan calculator

Pension plan calculator or retirement planning calculator available online is an efficient and effective tool that helps you draw a roadmap for your financial security in the golden years of your life. Following are the main advantages of using pension plan calculator while you are planning for your retirement:

  1. Provides your financial guidance:

    Every bread earner of the family wants to secure his and family’s life post his working years of life. To get a clear idea of how much one needs to save for availing adequate security post-retirement, a tentative calculation and guidance are needed. As the pension plan calculator helps you understand the amount that you need to save, you get a clear picture of what needs to be done

  1. Pension plan calculators do the amazing job without any cost:

    You can plan your retirement without any cost of the assessment.

  1. Retirement calculator helps you in long-term planning:

    Retirement calculators assess your long-term financial requirement based on your needs, lifestyle and current financial status.

How to use pension plan calculator?

When you access an online retirement planning calculator, you need to insert below details

  1. Your date of birth to find figure out your current age
  2. Fill in the expected retirement age in years. This will be the tentative age at which you would want to retire.
  3. Choose your risk appetite. This will help to know your risk profile – conservative, moderate or aggressive
  4. Choose your post-retirement lifestyle – luxurious, comfortable or basic
  5. Mention details of current income that salaries income, current expenses
  6. Mention details of investments that you have already made for the purpose of retirement
  7. Input the amount of savings that you can make every month

Once you provide all the details, the online pension plan calculator will take your age, savings details, years left for retirement into consideration and then factor in inflation to calculate the corpus required for your retirement life. This will also show how much money you need to invest monthly to achieve this corpus target. Based on the information given by you, the retirement calculator makes an estimated projection and calculates your future cost of living after considering inflation at an assumed rate.

Let’s take an example to understand this.

Let’s say you are born on 1st October 1989 and you are planning to retire at the age of 60 years. Your current annual salary is INR. 10, 00,000 and your yearly savings are INR. 1, 00,000. You would prefer to make investments in moderate risky financial products. Post-retirement, you would want to live in your own house comfortably.

That means you would be retiring in 2049! You have 30 more years to save for your retirement life. If you assume inflation at the rate of 6%, you would need INR. 2 Cr corpus to be saved for your comfortable retirement life. The corpus can yield you adequate pension post-retirement. To achieve this, you would need to save approximately INR. 16,000 per month.

Pension plan calculator makes it easy for you to plan your retirement life. If you have a clear roadmap, it becomes easy to reach the desired goal. Planning retirement well in advance is imperative to lead life peacefully post-retirement.

Why is pension required post-retirement?

Pension is required after retirement to create a source of income. Retirement is that time when you don’t have a regular source of income but the expenses do not stop. To meet these expenses and to be financially independent you need a source of income. Pension receipts are the source of this income and play an important role after you retire.

Types of pension instruments available in the market

Since pension plays an important role after retirement, there are different types of pension instruments which you can choose to create a retirement corpus. Some of the most popular types of instruments are as follows –

  1. Mutual funds

    Mutual funds are market-linked investment avenues wherein the investment risk is diversified. You can invest in small affordable amounts regularly through Systematic Investment Plans or you can invest in lump sum into mutual fund schemes. There are different types of schemes with different risk profiles and you can choose any scheme to create a retirement corpus.

  1. EPF

    Employees’ Provident Fund or EPF are retirement related investment schemes for those of you who are employed. 12% of your salary is invested every month by you and your employer towards the EPF account. The money accumulates till you are employed and then it pays you pensions after retirement. EPF is a good way of creating a retirement corpus and a guaranteed pension post-retirement for salaried individuals.

  1. PPF

    Public Provident Fund or PPF is a voluntary investment scheme wherein you can invest to create a retirement corpus. PPF investments can be done by both employed and non-employed individuals. The investments done, interest earned and the corpus created are all tax-free in your hands. Moreover, PPF investments have a long-term horizon allowing you to build up a substantial retirement corpus.

  1. NPS

    National Pension Scheme (NPS) is a newly introduced retirement oriented investment scheme. You can invest in the NPS scheme and build up a corpus for your life post retirement. The investments in NPS are directed towards the capital market which allows you attractive returns. Moreover, you can claim an additional tax deduction of up to INR 50, 000 on your NPS investments under Section 80 CCD which also helps you in saving tax.

  1. Life insurance pension plans

    Life insurance pension plans are retirement plans meant to create a regular source of income after you retire. You can invest in these plans to create a retirement corpus and receive guaranteed income post retirement. There are two types of pension plans which are as follows –

    1. Deferred pension plans which allow you to build up a retirement corpus by gradually investing over your active working life. You can buy a deferred annuity plan and choose a policy term over which you can pay the premium and build up your retirement corpus. You can then pay premiums to build up the corpus. In case of death during the policy tenure the plan would promise a death benefit to your nominee. On the other hand, when the plan matures, you would have created a corpus for your retirement. You can, then use the corpus to receive lifelong annuities
    2. Immediate annuity plans which give you regular income immediately after you buy the plan. These plans are for those who have built up a retirement corpus and are looking to invest the corpus for earning regular incomes. Immediate annuity plans promise lifelong incomes from the corpus that you invest. They also allow you to choose from a variety of different annuity options to receive the income. You can either receive the income only for yourself or you can add your spouse and ensure that your spouse also receives a regular income if you die early.

      Life insurance pension plans, therefore, are a source of guaranteed income for you after you retire.

Why retirement planning is required?

Following are the reasons why you need to plan your retirement well in advance, in fact as soon as you start earning.

Need for retirement planning

  1. Peace of mind:

    One of the crucial reasons to plan retirement in advance is for peace of mind in the golden years of your life. Planning several decades in advance gives you and your family a sense of security. Specifically, after retirement when you are free of all the major responsibilities of your life you would want to pursue a hobby or go on vacation and spend quality time with your life partner. You may also need fund to meet your healthcare requirement at that age. Considering all of this, financial worry is the last thing that one would imagine at the retirement age. If you would want to lead a peaceful and comfortable post-retirement life.

  2. Compounding effect:

    When you start investing for retirement at an early age, you get the benefit of compounding. Specifically, for long-term goals like retirement, planning is very much essential to reap the benefits of compounding.

  3. Insufficient employer-funded pension:

    An employer funded or government-funded pension schemes are not completely sufficient to meet your post-retirement needs. Hence, it’s important to plan retirement and fill the gap in investment. You can make use of pension plan calculator to know the tentative pensions and how much you need to invest to get to the target point.

  4. Support system:

    You never retire from your responsibilities. Also, desires never end. Even after you retire, you would still want to fulfil your family’s dream and stay as a support system for them always. Planning retirement life well in advance helps you to stay as a support system to family even after you retire from work.

  5. Social security:

    In a country like India, focusing on the social security system is imperative. It’s wise to plan in advance for your retirement life and start building a corpus for a happy and comfortable life later. You should be self-sufficient to face the unforeseen events along with meeting regular expenses.

    With the help of a retirement planning calculator, you can effectively and efficiently plan for your prosperous post-retirement life.

Frequently Asked Questions:

  1. What is the pension plan?

    A pension plan is a financial product offered by insurance companies. Pension plans help you build sizable retirement corpus through regular investments that you make over the years. On maturity or at the time of the vesting of the policy, you can take part of the corpus in a lump sum and the remaining will be used to buy annuities which will continue to pay you regular monthly income. You can also choose to buy annuities with the entire corpus without withdrawing the lump sum.

  2. When is the ideal time of your career to plan for retirement?

    There is nothing called an ideal time for retirement planning. It’s always sooner the later. It’s wise to start contributing to your retirement corpus as soon as you start earning. With age and time, you can keep increasing your investments.

  3. What are the factors I should consider while planning for my retirement?

    You need to keep certain key points in mind while planning for your retirement. Following are the key factors to consider while you plan for retirement:

    • Current financial conditions which include your current income, expenses and existing savings
    • Your debt obligations
    • Long-term living arrangements
    • Financial planning for other long-term goals

    While planning, to get clear guidance on the amount that you need to invest you can take the help of pension plan calculator.

  4. What are the tax benefits offered by pension plans?

    Annual contributions made to pension plans qualify for tax deduction under Section 80C of the Income Tax Act, 1961. Tax implications of pension plans also depending on the type of plan you are availing.

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