Will your money last as long as you do? Why pension planning should start today
₹1 crore sounds like a comfortable retirement. Now spend ₹1 lakh a month from it, and raise that a little each year as prices go up. Even if the rest of the money earns 7% a year, it's gone before you turn 69.
Most of us plan for the day we retire. Very few plan for the 25 or 30 years that come after it. This article explains the one kind of income that can't run out, how it can protect your spouse too, and what it takes to build one if you're 30, 35 or 40 today.
₹1 crore, ₹1 lakh a month: how long does it last?
Suppose you retire at 60 with ₹1 crore and need ₹1 lakh a month, raising the amount by 5% a year to keep up with prices. The money left over earns 7% a year. It runs out in less than 9 years.
Many Indians now live into their late 80s. That could mean 20 years or more with no income of your own, depending on your children or on whatever is left. Planners call this longevity risk: the risk of outliving your money.
Why savings run out
- Fixed deposits: safe, but the interest rate changes every time you renew, and it can fall sharply. Once you start spending the capital, the income shrinks.
- Mutual funds (monthly withdrawals): can grow, but a market fall in your early retirement years can shrink the pot fast. Nothing is guaranteed.
- Rental income: depends on tenants, repairs and empty months, and is hard to split or sell when you need cash.
- Senior Citizens' Savings Scheme: backed by the government, but limited to ₹30 lakh and runs for five years at a time, at whatever rate applies when you renew.
- Your children: they may help, and many do. But it isn't a plan, and it's not a burden most parents want to put on them.
The only income that lasts as long as you do
An annuity is the one financial product that turns your own savings into an income guaranteed for as long as you live, whether that's 10 years or 40. You pay a lump sum to a life insurance company, regulated by IRDAI, and it pays you every month for life. The rate is fixed on the day you buy, so falling interest rates or markets can't reduce it. It's the closest thing to a salary that never stops.
Government schemes like EPS (the pension part of your EPF) and Atal Pension Yojana also pay a lifelong pension, but only to eligible members and within fixed limits. Atal Pension Yojana, for example, is for people who join between 18 and 40, isn't open to income-tax payers, and pays at most ₹5,000 a month. For most people, an annuity is the only way to buy a guaranteed lifelong income with their own savings.
And for your spouse, for as long as they live
This is what many people don't know. An annuity can be set up so your spouse keeps receiving an income after you die:
Joint life
Pays you for life, then continues to your spouse for as long as they live.
Joint life with return of purchase price
Pays you both for life, and then returns the amount you paid to your children or nominee.
The monthly income is a little lower than a single-life annuity, because it's expected to be paid for longer. For a couple where one partner depends on the other's income, that's usually a price worth paying. Read more in What is an annuity?
How big a pot do you need?
The pension you get depends on the pot you bring to retirement and the annuity rate when you buy:
Pot needed = monthly pension × 12 ÷ annuity rate
At a 7% annuity rate, a pension of ₹1 lakh a month for life costs about ₹1.71 crore. That's the target in the examples below.
What it takes at 30, 35 or 40
Start with an amount that suits your age today, and raise it by 5% every year as your salary grows:
| Age today | Start with (a month) | You put in | Pot at 60 | Pension for life (a month) |
|---|---|---|---|---|
| 30 | ₹5,000 | ₹40 lakh | ₹1.46 crore | ₹85,300 |
| 35 | ₹10,000 | ₹57 lakh | ₹1.71 crore | ₹1 lakh |
| 40 | ₹15,000 | ₹60 lakh | ₹1.45 crore | ₹84,400 |
At 35, ₹10,000 a month, raised 5% a year, builds the ₹1.71 crore pot that buys a ₹1 lakh-a-month pension for life. Wait until 40, and you start with ₹15,000, put in more money, and still end up with less. The 30-year-old reaches almost the same pot as the 40-year-old with ₹20 lakh less of their own money.
Every five years you wait, you need to start bigger and still finish smaller. See what waiting really costs.
Assumes contributions rise 5% every year, a steady 9% yearly return, yearly investments made at the start of each year, and a 7% annuity rate with the whole pot used to buy the pension. These are future rupees: prices will have risen by then, which is why raising your contribution each year matters. Returns aren't guaranteed, and annuity rates change over time.
How to start this week
- Start with an amount that suits your age, using the table as a guide. If you can't manage that yet, start smaller: even ₹2,000 a month is far better than waiting. In NPS, Tier I needs as little as ₹1,000 a year.
- Set it up to happen automatically every month, so you never have to decide again.
- Raise it by at least 5% every year, ideally with every salary hike, before you get used to spending the extra.
- Ask your employer whether they offer NPS through payroll. Their contribution adds to your pot and saves tax.
- When you retire, think about your spouse. If they depend on your income, a joint-life annuity keeps them secure.
Frequently asked questions
Is there any investment that guarantees income for life?
For most people, only an annuity from a life insurance company turns your own savings into an income guaranteed for as long as you live. Government schemes like EPS and Atal Pension Yojana also pay lifelong pensions, but only to eligible members and within fixed limits. FDs, mutual funds and rent can all fall or run out.
Can my pension continue for my spouse after I die?
Yes. With a joint-life annuity, the income continues to your spouse for as long as they live. With a return-of-purchase-price option, the amount you paid also goes to your family after you have both died. The income is a little lower than a single-life annuity.
How much do I need for a pension of ₹1 lakh a month?
At a 7% annuity rate, a pension of ₹1 lakh a month for life costs about ₹1.71 crore: ₹1 lakh × 12 ÷ 0.07. Annuity rates change over time, so treat this as a guide.
How much should I invest each month at 35 for my pension?
As a guide, ₹10,000 a month at 35, raised by 5% every year until 60, could build a pot of about ₹1.71 crore, assuming a 9% yearly return. That's enough to buy a pension of about ₹1 lakh a month for life at a 7% annuity rate. At 30, ₹5,000 a month builds about ₹1.46 crore; wait until 40, and even ₹15,000 a month builds only about ₹1.45 crore.
Is an annuity better than a fixed deposit for retirement?
They do different jobs. An FD keeps your money flexible, but its interest changes when you renew, and once you start spending the capital it can run out. An annuity locks in an income for life, so you can't outlive it, but the money is usually committed for good. Many retirees use both: an annuity for essential expenses, and savings for flexibility.