Retirement is one of the happiest phases in our lives. It gives us a chance to relax, catch up with our friends and family, explore new hobbies, and take leisure trips around the world. Yet, without a monthly income, maintaining our lifestyle after retirement needs prudent financial planning.
This is why having a pension plan, a reliable source of income after retirement, is essential. But what is the minimum amount of savings you will need to retire comfortably?
We can determine the required value with the help of a pension calculator. In this blog, we will also learn about the benefits of these retirement plans and understand what options are available to investors.
What Is a Pension Plan, and Why Do You Need One?
A pension plan is a financial tool provided by insurance companies and approved by the government that helps individuals save money for retirement.
It allows investors to build a lifelong savings corpus that begins providing a regular pension from the day a person retires. There are various reasons why a person should invest in a retirement plan for financial security.
Some of them are as follows:
- Increased life expectancy: People today are beginning to lead more healthy lives and live much longer than they used to in the past. This suggests that a pensioner may expect a steady stream of income for two to three decades after retirement.
- Inflation: The prices of goods and services tend to rise over a period of time. A single monthly pension may not be sufficient to cover all expenses, depending on one’s lifestyle.
- Medical needs: Healthcare and medical expenses can be quite costly at times. Having a pension gives the assurance of being able to afford any medical emergency.
- Financial independence: A pension plan provides financial freedom, allowing one to enjoy life after retirement without having to worry about monthly expenditures.
How Does a Pension Calculator Work?
Many people may wonder how much monthly savings would be needed to build the nest egg they desire for their retirement. This query may be effectively addressed using an easy-to-use online tool known as a pension calculator.
These calculators do the number crunching for investors and display their required monthly savings to achieve their retirement goals.
Factors That Influence Pension Calculator Calculation
Most pension calculators currently in the market operate on a handful of inputs. Here are the five most common variables that influence the calculation of these online tools:
- Current age: the age at which the investor begins to save for retirement.
- Age at retirement: the age at which the investor expects to retire (say, 60 years).
- Current monthly expenses: the estimated total monthly expenses that a person incurs today.
- Inflation rate: the expected rate at which the prices of goods and services will rise over a period of time.
- Rate of return: the average rate of interest that one expects to earn on an income-generating asset.
- Personal net worth: the amount of money that one currently has in their retirement account.
Example: See How to Use a Pension Calculator
To better understand the application, let’s take the following example. Suppose Rohan is 30 years old and wants to retire at the age of 60. He has a span of 30 years to build his retirement corpus. He currently earns ₹40,000 every month for his personal expenses.
Let’s say he wishes to maintain the same lifestyle after retirement even at the age of 60. Considering that the rate of inflation is 6% per annum, his future expenses are expected to shoot up. Thus, he wants to have enough corpus to fund his monthly expenses of ₹2.3 lakh at the time of his retirement.
Further assuming a rate of return of 10% on his investments for a period of 20-25 years until retirement, he would need to save a total corpus of ₹4.8 crore in order to withdraw a ₹2.3 lakh monthly pension from age 60.
According to the pension calculator, he must put aside approximately ₹21,000 every month in order to create a nest egg of ₹4.8 crore. If Rohan decides to delay his retirement savings to the age of 40, he will have only two decades to achieve the same target corpus.
This would require Rohan to have a higher monthly savings contribution of over ₹63,000 to provide himself with a decent pension at the age of 60.
Types of Plans According to Your Pension Needs
Insurance companies have a variety of retirement income products that help investors determine their retirement savings needs. An investor must keep in mind his risk appetite while selecting a product to build their retirement corpus.
Deferred Annuity Plan
This retirement product involves making regular premium payments until retirement while the insurance company accumulates the corpus. Upon retirement, the policyholder begins to receive regular monthly payouts for the rest of his life. Further, the product offers various annuity payout options that suit different financial needs of investors.
Immediate Annuity Plan
Also known as a single-premium immediate annuity (SPIA), this plan allows investors to invest a large sum of money as a lump-sum payment instead of investing a small portion of the corpus regularly. The large deposit will start paying out the monthly annuity immediately after the purchase of this product, with no waiting period.
Unit-Linked Pension Plan (ULIP)
ULIP is a combination of market-linked equity funds and insurance. ULIPs offer life insurance on an ongoing basis while building up a retirement corpus for the policyholder. It is perfect for individuals with moderate risk tolerance, as it enables both wealth creation and financial security.
Guaranteed Return Retirement Plan
As the name implies, these retirement products provide a risk-free investment option with a guarantee of moderate savings growth. Investors may also select between market-linked and non-linked products for guaranteed savings. A non-linked (fixed) pension product offers a fixed income for life. This option is quite popular, as it is free from the market risks that usually come with market-linked investments.
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Taxation Aspects Under the New Tax Regime of the Income Tax Act, 2025
The tax laws regarding income tax apply to all sources that can be invested into a retirement savings product. The taxation rules governing life insurance investment products are described below:
- Deductions on Premium Amount: Tax deduction under Section 123 of the Income-tax Act, 2025, provides a tax exemption on the amount of premium paid for a life insurance policy under the Old Tax Regime available in the Income-tax Act, 2025. Further, Section 124 stipulates a yearly overall maximum premium deduction limit of ₹1.5 lakh.
- Exemptions for Commuted Pension: Section 10(10A) of the Income-tax Act, 2025, allows tax exemption on commuted pension under a retirement plan for a specified minimum term of service as prescribed under Section 9(1) of the Pension Payment Act, 1994.
- Taxation on Regular Annuity Amount: A regular annuity is a form of pension that one begins to receive monthly or yearly upon retirement. This income is subject to tax as a form of income under the relevant income-tax slab that one falls under.
- Exemptions for Death Benefits: Death benefits payable by an insurance company to one’s nominee are completely free of income tax under Section 10(10D) of the Income Tax Act, 2025.
Note: Keep in mind that these tax regulations are subject to change from time to time. You are advised to consult a tax specialist to clarify your questions and concerns about income tax.
Tips To Shortlist Pension Products
Some useful pointers to make an informed choice while shortlisting retirement savings products are mentioned below:
- It is important to begin retirement savings as early as possible. Investors have more time to accumulate a corpus if they begin to save in their mid-twenties or thirty years before retirement.
- One should make a habit of using a pension calculator every two to three years to recalculate their monthly savings. In the mean time, it is essential to invest an additional amount whenever a change in income is observed.
- Investors must always make efforts to understand the riders covering various life events offered by the insurance company. Riders such as critical illness cover and other top-up benefits differ from company to company in terms of benefits, limits, and premiums.
- One must review the terms and conditions stated in a retirement income product, including details about surrender, withdrawal, and lock-ins.
- It is also essential to incorporate an appropriate inflation rate in one’s calculation.
Conclusion
Investors must learn about retirement savings and should use a pension calculator to estimate their monthly needs. Whether an investor is a young professional in their twenties or someone close to retirement, finding the right retirement income product can help them have a happy, satisfying retirement.
