Thirty already! Firm up that pension plan

NEW DELHI: Are you around 30? Do you come from an urban middle-middle class family? If your answer is "yes", you need to read this very carefully.
Starting today, you better start putting in at least Rs 32,000 per year in pension fund-type products.
Here''s why. Today, an urban middle-class home spends a minimum of Rs 8,500 per month. This takes into account house rent (or mortgage repayments), groceries, conveyance, school expenses and utilities.
Can you guess, what would be the minimum monthly expenses 30 years hence? To give you an idea of the impact of different inflation rates on expenses, a monthly expenditure of Rs 8,500 in today''s terms would go up to Rs 20,633 after applying an inflation rate of 3 per cent, Rs 27,569 (for 4 per cent) and Rs 36,737 (for 5 per cent).
While we would all like to have low inflation rates, economists expect an average inflation rate of 4.5 per cent over the next 30 years.
Thus, applying an inflation rate of 4.5 per cent, the monthly expenses would rise to about Rs 31,000, 30 years hence.
The big question, therefore, is: How will you earn that kind of money month after month - after you have retired?
It''s one tough question; something our parents did not spend much thought on. But then, most of our parents have been luckier than us.
Not only were interest rates so low, the social fabric of our country also ensured that the responsibility of earning a livelihood and providing for the entire family were passed on from generation to generation.
Put simply, if the interest rates on pension and gratuity funds were not enough to make ends meet for retired parents, there has always been a son or a daughter who took up the responsibility and bridged the gap.
That was then. Today, many 30-year-olds are not very sure about the future structure of their family. As of date, their middle-class existence comprises parents, themselves (with spouse) and children. But, what will happen in future?
Will their children continue to live with their parents and provide economic assistance - whenever necessary - as has been the case now? Or, whether the parents will have to fend for themselves in a so-called Westernised society - 30 years hence?
One, unfortunately, does not have the answer. But, being prepared for such an eventually is not a bad idea. After all, who wouldn''t like to be financially secure after retirement from active work?
The amount that one needs to save today for post-retirement needs will, of course, depend on several factors like where the person will live (cost of living will be higher in metros, compared to small-towns), number of dependents, health related problems and subsequent expenses, etc.
Therefore, assuming that you will have no other income other than your long-term savings when you reach 60, you will have to save at least Rs 32,000 per year for a period of 30 years in order to receive an annuity of Rs 3.60 lakh per year (or Rs 30,000 per month).
Investments in pension funds - which put in your monies in long-term debt paper - is an ideal avenue. The returns at about 7 per cent per year may not be very attractive, but they are steady. More importantly, they are comparatively risk-free.
The current tax incentive u/s 80CCC(1) is Rs 10,000 for pension fund-type products. People - who put in money in these funds - rarely cross the Rs 10,000 mark. They argue, there''s no tax incentive beyond Rs 10,000.
True, but have they thought about the returns on these investments?
Investing Rs 10,000 per year would yield an annuity of only about Rs 1 lakh per year after 30 years - which works out to less than Rs 9,000 per month.
Apply the rate of inflation of 4.5 per cent over 30 years, and even this amount is reduced to only about Rs 2,200 at current prices.
But, before you call up your investment advisor after reading this article, do take note of another unsavoury truth.
The Indian government believes in doubly taxing those who exceed the Rs 10,000-mark. First, at the saving stage, and then at the annuity stage.
This continues to happen in India, while world over, tax reforms have been the driving force behind pension reforms. By making tax concessions up front, governments have ensured that people are able to save for their retirement.
Thankfully, this year''s Union Budget is tipped to announce a liberal policy of tax incentives for pension schemes run by the private sector. Once this happens, it will not only address the long-felt need to institute a structured system of funded social security for the aged, but also encourage long-term savings.
Macro-economically speaking, long-term savings in pension funds also act as suppliers of long-term capital of the kind needed by infrastructure projects.
Pension funds'' liabilities to pensioners are of a long-term nature and they need assets of matching tenure for investment. Infrastructure projects offer just that.
To cut a long story short, the only way out of post-retirement blues is to have funded pensions, where you and me will systematically tuck away a portion of our income year-after-year over an extended period for securing an income stream after we retire. Let''s do it.