While preparing a slide deck for a talk at the Reserve Bank Staff College, I made a bespoke retirement calculator that factors in an indexed pension. Here is how that makes a huge difference to a retirement plan.
An indexed pension increases each year at a set rate or inflation rate. This is known as dearness relief. Until a few years ago, RBI employees had no dearness relief and only had a constant pension. Then, indexation was introduced. This is similar in structure to the unified pension scheme.
The freefincal robo advisor users can include up to three indexed income sources (pension, rent, dividends, etc.) while planning for retirement.
Let us look at an example. There are several conservative assumptions in estimating the pension and other aspects of the retirement plan here.
Age at the end of the current year: 31
No of years you expect to work: 29
Current expenses per month (annual/12): Rs. 60000
Expected inflation before retirement: 6.00%
Expected inflation after retirement: 5.00% (this is perhaps a touch low, but I had to set it at 5% so that it approximately matches the pension indexation. This allows me to avoid macros/scripts in the Excel file)
Estimated years in retirement: 25
The average rate of return (after tax) expected before retirement: 9.00% (this a crude approximation)
Anticipated post-retirement rate of interest (after tax): 6.00%
The tool also factors in investments made in three different asset/tax types and their future value
Annual increase in monthly investment: 5.00%
Current monthy Basic pay: Rs. 50,000
Approximate basic pay at the time of retirement: Rs. 2,70,919 (salary increase ~ 6% a year, factoring in increments, promotions and pay commissions)
Approximate monthly pension at retirement: 2,25,766 (half of last drawn basic + 1/3rd of last drawn basic as DA). This is probably the most contentious assumption, as we do not know the DA rate at the time of retirement.
Annual pension before tax Rs. 27,09,194
Annual pension after tax Rs. 22,09,725 (assuming current new tax regime rates)
Monthly post-tax pension Rs. 1,84,144
Monthly expenses in 1st year of retirement Rs. 3,25,103
Net monthy income reqd from the corpus in 1st year of ret Rs. 1,40,959
Total retirement corpus required: Rs. 3,78,29,519
Net corpus to be saved Rs. 3,17,43,428 (factoring in some current investments)
Initial monthly investment required 12,050 (to achieve the net corpus).
Illustration of retirement planning with an indexed pension
In this illustration, the gap between expenses and the indexed pension is handled using a bucket strategy using the Rs. 3.78 Crore corpus.
That is a 131% increase in the total corpus and a 156% increase in the initial monthly investment required.
If the pension were constant throughout retirement without indexation, the total corpus required would be Rs. 5.73 Crores, the net corpus (considering the same investments) would be Rs. 4.49 Crores, and the initial monthly investment required to achieve this net corpus would be Rs. 17K.
Thus, an indexed pension makes a considerable difference to a retirement plan. It also significantly increases the government’s pension burden.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.Our flagship course!Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions!⇐More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.Increase your income by getting people to pay for your skills!⇐More than 800 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos! Our book for kids: “Chinchu Gets a Superpower!” is now available!Both the boy and girl-version covers of "Chinchu Gets a superpower". Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. The narrative revolves around what he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management. What readers say!Feedback from a young reader after reading Chinchu gets a Superpower!
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Dr M. Pattabiraman (PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over 13 years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), LinkedIn, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)