Pension is your income when you decide to leave the workforce. Simply put it’s the money you get every month without work. Now the important part is how much pension is enough?
To answer that we have two generic methods to calculate your pension needs. We have seen that some can live on ₹20,000 per month & others need ₹1,00,000 to maintain their lifestyle.
In short, Pension needed depends on you, your way of life, your current age, your retirement age, inflation (mehgayi), expected rate of return in retirement & 10 more factors.
Before we start, let’s assume you are Ramesh or Rashmi or Prof. X:
- You are 30 years old & works as Manager at an MNC
- Your current Income = ₹10,00,000 annually & expenses = ₹50,000 monthly
- You get an average 10% hike on the yearly package and the rate of inflation in India is 6%
- Your desired retirement age is 55
Looks like now we know you & we are ready to see how different methods calculate your retirement/pension need.
Income Replacement Method
Remember you earn ₹10 lakhs annually, right? Now the concept here is that when you will become 55 years old, we will replace your salary with a pension.
So let’s say you earn X, you will need a pension which is X multiplied by the Income replacement ratio( usually 70% to 90%).
The income replacement ratio is calculated as gross income after retirement/gross income before retirement.
Let’s find your magic number
- Income today at age 30 = ₹10,00,000
- Income growth/hike = 10% yearly
- Future Income at age 55 = (current income*(1+ hike)^(retirement age - current age))
- Future Income at age 55 = (₹10,00,000(1+ 10%)^(55 - 30))
- Future Income at age 55 = ₹1,08,34,706
- Income replacement ratio = 75%
- Pension needed = Future income*Income replacement ratio
- Pension needed = ₹1,08,34,706*75%
- Pension needed = ₹81,26,029 yearly
As per the income replacement method, you would need a monthly income of INR ₹6,77,169!
And That’s a lot!
Expense Projection Method
Remember your expenses today are ₹50,000, right? Now the concept here is that your expenses will grow with inflation till retirement and in retirement phase, we should have a pension to match your future expenses at any given point of time.
Let’s find your magic number by expense projection retirement planning method
- Expenses today at age 30 = ₹50,000
- Inflation (mehgayi) = 6%
- Expenses at age 55 = (expenses*(1+ inflation)^(retirement age - current age))
- Future Expenses at age 55 = (₹50,000 (1+ 6%)^(55 - 30))
- Future Expenses at age 55 = ₹1,71,675
- Pension needed = Future Expenses
- Pension needed = ₹1,71,675 monthly
Looks like we need just ₹1,71,675 per month as pension to meet our expenses.
Now you will wonder which number is right, fact is none of them are. Your right pension number is somewhere in between which these methods failed to get due to many assumptions they take while calculating.
PensionBox’s AI-Powered Dynamic Method
Let’s just say we are India’s first & most advanced pension planning platform. We have fixed the gaps in generic methods to create our own method to get the right number for you.
That’s not it, we have created a way to ensure that you can plan, track, save & reach your retirement savings goals with complete transparency.
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