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.
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.