Atal Pension Yojana may not be enough, plan for your retirement
The earlier you start the better it is as you will need to save less to garner the necessary amount.
While the scheme looks to offer a post retirement security net to all, the amount of Rs 5,000 may not be enough to cover even your basic expenses after 20 years.
The government recently announced the Atal Pension Yajana for all bank account holders in the country under which the Centre guarantees a fixed pension between Rs 1,000 and Rs 5,000 per month from the age of 60, depending upon the contribution.
Under the scheme, the government will contribute 50 per cent or Rs 1,000 per annum (whichever is lower) for a period of 5 years from 2015-16 to 2019-20 after which the scheme may continue but will receive no Central contribution.
While the scheme looks to offer a post retirement security net to all, the amount of Rs 5,000 may not be enough to cover even your basic expenses after 20 years.
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If you are 30 years old and your daily expense currently is within Rs 40, only then would the monthly pension of Rs 5,000 be enough for you at the age of 60 (assuming an average inflation over the next 30 years is 5 per cent). And, if your basic daily expense is Rs 100 now, you would need Rs 12,965 per month at the age of 60 to cover your expenses.
This may not be enough for most of us and it is necessary to figure out the basic expense, extrapolate it at the rate of average expected inflation to figure out the monthly expense at the age of 60. If the expected life is 85 years then one must first calculate the amount of money to be accumulated that can sustain the monthly expense for 25 years at a defined interest rate. Once the amount is known, one can calculate how much he should save for the remaining work life every month to arrive at the magic monthly saving figure.
The trick is, the earlier you start the better you are as you will need to save less to arrive at the same amount — thanks to the compounding effect.
How much to save?
Case scenario: a 30 years old individual who plans to retire at 60 and expects to live till 85 years.
If the expected average annual inflation over the next 30 years is 5 per cent and the person’s monthly basic expense is currently Rs 40,000 then his expense would rise to Rs 1.73 lakh per month at the age of 60.
Since fuel, telephone and other expenses will come down post retirement, he can safely assume that he would need 80 per cent of Rs 1.73 lakh per month which amounts to Rs 1.38 lakh.
At an interest rate of 8.5 per cent and inflation 5 per cent he would need to accumulate Rs 2.81 crore by the age of 60 to be able to sustain the monthly expenses of Rs 1.38 lakh for 25 years. The graphic shows how much one needs to save every month to be able to garner Rs 2.81 crore.
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