MANAGEMENT OF PERSONAL FINANCE: PART 1


Retirement is finally the time to do what you have always wanted to do


Pension plans: Introduction

Our working life generally ends at 60years. Thereafter our salary stops coming every month and we have to make arrangements for money by saving it during our working life ,generally 25 years to 60year period. 

   Till late 1980s there was a pension given to retirees every month. This the government arranged through taxation or private firms  from their profits. However especially in developed countries the population is age ing rapidly as a result of which the increasingly smaller working age group population have to be taxed heavily to provide pension for the aged.To obviate this in many developed nations the age of retirement is being raised so that pension provision by employer can be delayed.

   As a result there is a shift to employee contributory pension where the employee saves a portion of his salary during his working career and thereafter uses the same during retirement.The pension plans are of two types: First the EPF which is employee provident fund, and it provides matching contributions from employee upto a upper limit and second is NPS where there is no matching contribution but it is managed by government and the contributions are invested in debt funds or stocks.Both plans receive income tax benefits in the form of no taxes at the time of withdrawal of funds as well as absent taxes for periodic contributions upto a upper limit.

Corpus requirement   

A possible way to calculate total amount of corpus at time of retirement to be accumulated during working life can be calculated based on last salary drawn at 60 years of age.Suppose a pensioner has a last salary of 2.6 lakhs today. He should be comfortable at 80% of his salary after retirement considering his needs are less. So a pension of 2lakhs per month is required for 30 years or age of ninety. 

  However for a 30year old individual retirement is still 30years away. We have to calculate his last salary and pension based on it from the present figure of 2lakhs. To calculate his salary  after 30yearswe have to take into consideration  inflation which will reduce the purchasing power of money and after 30years the pension should escalate to 8lakhs for a monthly last salary of 10lakhs ,assuming 5% inflation on averag .

   To calculate pension requirement after the age of 60years for subsequent thirty years upto age of 90,we have to consider that average 5% inflation will reduce the purchasing power till age of 90 years. If first years pension is 8 lakhs into twelve or 1crore after 30 years it will be much less in value.

With 5% inflation we can assume pension annually will escalate from 1 crore in age 60 to 1.6 cr at age  70 to 2.6cr at age 80years. Adding the entire sum comes to corpus requirement of 48 crores.

   However while pension is being disbursed monthly the remaining corpus is still earning return at say 10%. So total corpus requirement is much at less at 25 crores.

Saving the corpus

 The corpus of Rs 25 crores need to be saved from income over 30years of working life from age 30to 60years.This can be done by saving in NPS in mutual funds or index funds which give a long term return of 10%.

 Suppose a individual has average salary of 3lakhs per month increasing from 1lakh at 30years to 6lakhs at 40years.If he saves 20% of his salary every month and gets a return of 10% on his savings at age 40 his savings become 1.2crores. This saving amount he has to keep for 20years and it will get him of10% compounded return. This amount at age 60yrs then becomes8.07 crores.

  Considering an average salary of 6kakhs fron 40 to 50 years the total saved amount with interest comes to 2.4cr. This amount kept till 60yrs with 10% return becomes6.4cr.

Lastly from age 50 to 60yrs we assume average salary of 9lakhs. With 20% saving monthly and return of 10% total  saved amount is 3.8cr.

  So the largest contribution to pension comes from saving at age 30 to 40yrs.The total savings at 60years is sum of all three decades or18 crores. There is still a shortfall of 7crores from a calculated requirement of 25 crore. This can be made up from EPF where again contribution over 30years would give a large amount.

Ack:CHAT GPT,GOOGLE

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