Retirement planning in India has gone through a significant transformation across generations, since our parents’ retirement investments mostly relied on bank fixed deposits, pensions and savings accounts.
However, for investors in the last two decades or so, the majority of the investments in their portfolios are market-linked products like mutual funds and the National Pension System (NPS).
But does this transformation in retirement portfolios automatically mean that your retirement is safe, considering concerns around market volatility, inflation, longevity, and whether the accumulated corpus will generate steady income when regular salary stops?
Therefore, the comparison goes beyond just comparing returns on FDs versus SIPs or pensions versus NPS; it also looks at which generation has safer retirement planning and what modern investors may learn from how their parents prepared for their golden years.
13% FD rates, old pension: Was the 90s generation safer in retirement?
The 1990s generation invested very differently for their retirement, but it was not as simple as saying that high FD rates made everyone financially secure.
The previous generation did have an important structural advantage: retirement income was more often backed by defined-benefit pensions, particularly for government employees covered by the old pension framework.
However, it would be inaccurate to conclude that everyone retiring in the 1990s was financially secure simply because FD rates were high.
SBI FD rates peaked at around 13% in 1995-96, while EPF paid 12% a year from 1989 to 2000 and PPF offered 12% from 1986 to 1999. At the same time, inflation was also high, averaging around 9-10% in the mid-1990s. CPI inflation was 10.22% in 1995 and 8.98% in 1996.
Deposit rates were indeed substantially higher than today’s levels. RBI data shows that bank deposit rates for maturities above three years were around 13% in 1991-92, subsequently moderating to around 11.5–12% by 1997-98. EPF also offered a 12% interest rate through much of the 1990s, from 1990-91 to 1999-2000.
So an FD earning 13% was actually giving only around 2-4% after inflation. It is also important to understand that FD rates were high because inflation was high. As the RBI brought inflation under control over the following decades through tighter monetary policy and repo rate management, FD rates fell as well, dropping to the current range of 6.5-7.5%.
For government employees covered by the Old Pension Scheme (OPS), the situation was more comfortable because they received a defined pension equal to 50% of their last drawn salary, along with Dearness Allowance adjustments.
For private sector employees who depended mainly on FDs and EPF, inflation took away the majority of their returns. Hence, that generation invested differently, but they were not necessarily financially free due to the threat of inflation.
“But the key point is that nominal returns should always be viewed against inflation. A 12–14% return sounds very high in isolation, but its real value depends on the inflation prevailing at the time. Moreover, those high rates were not permanent; interest rates subsequently declined significantly,” according to Vishwajeet Goel, Head of Pensionbazaar.
The bigger advantage for an eligible government employee under the old defined-benefit pension system was that the retirement income was linked to salary/service rather than investment-market performance.
Under the CCS Pension Rules framework, pension was broadly calculated at 50% of emoluments/average emoluments, subject to the applicable rules, with Dearness Relief providing an inflation-linked component to pension.
So the previous generation’s security came from a combination of defined-benefit pension, provident-fund accumulation, relatively high fixed-income rates and, in many cases, lower post-retirement financial complexity.
The important distinction is this:
● Old Pension: retirement income was primarily a defined benefit.
● FD/EPF: provided a relatively predictable return on savings.
● Today’s NPS/SIPs: the individual accumulates a corpus and must plan how that corpus will generate income for potentially 20–30 years.
Therefore, the previous generation was not necessarily “risk-free”, but a significant part of longevity and investment risk was effectively transferred away from the individual.
How did the OPS differ fundamentally from NPS?
The difference is essentially defined benefit versus defined contribution.
Under the old government pension framework, the pension was determined according to prescribed rules linked to the employee’s pay/emoluments and qualifying service. The individual did not have to build a market-linked corpus large enough to fund their entire retirement.
NPS, on the other hand, is a defined-contribution system. It was introduced for new Central Government employees from January 1, 2004, and subsequently opened to all citizens from May 1, 2009.
For Central Government employees covered by NPS, the employee contributes 10% of Basic + DA, while the Government contributes 14% of Basic + DA. These contributions are invested through the NPS architecture and the eventual retirement corpus depends on contributions, investment performance and the period of accumulation.
| Feature | Old Pension | NPS |
| Basic structure | Defined benefit | Defined contribution |
| Retirement income | Formula-based | Corpus-based |
| Investment risk | Largely borne by government/scheme | Primarily reflected in subscriber’s corpus |
| Longevity risk | Pension continues subject to rules | Individual needs to structure retirement income |
| Corpus requirement | Not primarily individual’s responsibility | Central to retirement planning |
| Market participation | Limited for pension calculation | Investments across equity/debt/government securities |
| Inflation protection | Pension framework included Dearness Relief | Needs to be addressed through investment and withdrawal/annuity strategy |
This is why comparing the two purely on “returns” misses the bigger issue. The old system primarily solved the income problem; NPS primarily solved the accumulation problem.
NPS exit: How to weigh annuity income against growth?
This is fundamentally a certainty-versus-growth trade-off.
An annuity provides something a market portfolio cannot promise in the same way: a contractual stream of income, subject to the terms of the annuity chosen. That can be particularly valuable for essential expenses.
At the same time, a retiree who puts too large a portion of the corpus into fixed-income/annuity structures may have less capital available for growth and inflation protection.
Current NPS rules have also evolved. Under the All Citizen Model, normal exit can permit up to 80% as lump sum and at least 20% as annuity, subject to the applicable exit rules and corpus thresholds.
The decision should therefore be based on the individual’s income requirement, other guaranteed income, health/longevity considerations, liquidity requirement and risk tolerance.
A useful way to think about it is:
Use guaranteed income to cover expenses that cannot be postponed; use growth assets to protect the expenses that will rise with inflation.
The right annuity allocation will therefore not be identical for every retiree.
No guaranteed pension: How safe is your retirement?
Today’s generation has more investment options and is much more aware of the power of equity in their portfolio. Over the long term, Nifty has delivered returns of around 12%, consistently beating inflation.
Hence, investors have the option to build a balanced portfolio with equity for wealth generation and debt for stability and liquidity.
NPS is often seen as a retirement option for investors, but investing in equity mutual funds would allow for more liquidity and flexibility. We can say that due to these investment avenues, retirement can be secured with a strong portfolio.
“Retirement planning comes down to having a strong enough corpus to last for 25-30 years and which keeps up with inflation. Guaranteed income will come with staying invested for the long term. Equity will allow the investor to build a large corpus size, which will provide both inflation and longevity protection,” said Bharath Rathore, Executive Director, Anand Rathi Wealth Ltd.
How much more market risk does a younger investor taking the SIP + NPS route face compared with a parent who relied mainly on FDs, EPF and a pension?
Investors who invest in equity can see short-term volatility, but this is the nature of market cycles.
“If we look at Nifty 50 since 2001, we can see that it has experienced an average peak-to-trough fall of around 18% every year. Post these corrections, we see that over the next 3 years it has seen returns of 20% and over the next 5 years returns of 17%,” according to Rathore.
Hence, it is the nature of equity to go up and down, which many fear and run away from.
The earlier generation focused more on traditional investments such as FDs and debt, which provide fixed returns but do not beat inflation over the long term. Hence, the real threat would not be market risk, but the threat of losing the real value of your corpus.
Mutual funds and NPS allow investors to participate in equity and debt markets over long periods.
Equity has historically offered the potential for higher long-term returns than traditional fixed-income products, but those returns are not guaranteed and can be volatile over shorter periods. NPS similarly offers multiple asset classes and investment choices rather than a predetermined pension.
The advantage is that a 25–35-year-old today has something the earlier generation had less access to at scale: a long investment horizon combined with diversified market participation and systematic investing.
The risk is that investors may confuse long-term return potential with guaranteed retirement income.
For example, an investment compounding at 10% for 30 years can grow roughly 17.4 times, while at 7% it grows roughly 7.6 times. That difference illustrates why return assumptions matter enormously over a retirement horizon. But actual market returns will not arrive at a smooth 10% every year.
PFRDA illustrates the impact of inflation and return assumptions in retirement planning. In one retirement-planning illustration, it assumes 5% inflation and 10% investment return, while showing that delaying the start of retirement saving materially increases the monthly investment required.
So today’s generation can build substantial retirement wealth, but financial security is no longer something that automatically comes with having a job and reaching retirement age. It has to be deliberately constructed.
Parents could depend on fixed pensions. How should today’s investors create their own monthly income?
The biggest mindset shift is to stop thinking of retirement planning as “How much corpus will I accumulate?” and instead ask “How will this corpus generate income for the rest of my life?”
A retirement corpus has to perform three jobs:
- Provide regular income
- Preserve purchasing power
- Last for an uncertain lifespan
Therefore, investors should ideally create multiple retirement-income buckets rather than depend entirely on one instrument.
According to Goel, a practical framework could include:
● Essential-expense bucket: relatively stable assets for near-term expenses.
● Growth bucket: equity-oriented investments for long-term inflation protection.
● Guaranteed-income bucket: annuity/pension products where certainty of income is the priority.
● Contingency/healthcare bucket: liquid funds earmarked for unexpected expenses.
The objective is not to reproduce the exact structure of a parent’s pension, but to replicate its economic function — predictable cash flow — using a combination of assets.
Why sequence-of-returns risk matters for MF and NPS investors
The sequence-of-returns risk is the risk that if markets fall sharply in the first 2-3 years of retirement and you are withdrawing from the same corpus, you sell more units at lower prices, permanently reducing the base that will recover later.
“Due to this concept, many investors avoid equity altogether. However, the simple solution to this is to separate your short-term income needs from your long-term growth corpus. Keeping 1-2 years of expenses in a liquid or short-duration debt fund means you never have to sell equity during a downturn,” stated Rathore.
Hence, you draw from the debt buffer and allow equity to continue to recover and grow, and then continue transferring funds to replenish the debt buffer.
It is very important for investors to stay invested through all market cycles in order to be a part of the eventual recovery that will follow, rather than panic exiting in losses.
25 years of retirement: Are FDs enough?
Investors often feel tempted to move heavily into FDs at retirement because it may feel safe, but this can cause a loss of value due to inflation. Someone retiring at 60 could still have another 25-30 years ahead, and their money needs to keep growing throughout that period.
If an FD earns 7% while inflation is around 6%, the real return is only about 1% before tax. Hence, the purchasing power will drop, leading to a weakening corpus.
“This is why investors should still keep the majority of their corpus in equity, allowing it to grow at around 12-13% while doing an SWP for regular expenses. 1-2 years of expenses can then be kept in debt or liquid investments to preserve liquidity,” recommended Rathore.
PFRDA has illustrated the magnitude of this problem: at 5% annual inflation, Rs 1 crore today would have purchasing power equivalent to only about Rs 23 lakh after 30 years.
Therefore, an FD-heavy portfolio can protect against market volatility while simultaneously creating inflation and reinvestment risk.
For retirement, the relevant question is not “Can I avoid losing money?” but “Can my portfolio grow faster than my expenses over the entire retirement period?”
How much equity should you hold before and after retirement?
A long-term portfolio should have an allocation of 80:20 in equity to debt, for growth and stability, as per Rathore.
As the investor approaches retirement, they can then transfer some amount from that portfolio and park it into liquid and debt funds for immediate access.
There should be 3 baskets: the long-term basket, as mentioned above; the medium term basket, which will have 70% equity and 30% debt; and the short-term basket, which will be allocated 100% to debt, Rathore further added.
This will preserve capital while not compromising on growth.
How large should the corpus be to replicate the financial security of a parent with a lifelong pension?
There is no universal corpus number because the answer depends on monthly spending, inflation, retirement age, life expectancy, taxation, healthcare costs and the return generated during retirement.
But a useful way to illustrate the scale is through withdrawal rates.
If someone needs Rs 1 lakh per month today, that is Rs 12 lakh a year.
A corpus of Rs 3 crore corresponds to an initial withdrawal of 4% of the corpus. Rs 4 crore corresponds to 3%, and Rs 5 crore to 2.4%.
The important point is that Rs 1 lakh today will not remain Rs 1 lakh in purchasing-power terms. At 6% inflation, Rs 1 lakh of monthly expenses becomes approximately:
● Rs 1.79 lakh after 10 years
● Rs 3.21 lakh after 20 years
● Rs 5.74 lakh after 30 years
This is why retirement corpus calculations should be based on future expenses rather than today’s salary or today’s spending.
PFRDA’s retirement illustrations similarly demonstrate that delaying investment dramatically increases the corpus and monthly contribution required because of compounding and inflation.
For someone without a defined-benefit pension, the target should therefore be expressed as a multiple of expected retirement expenses, rather than an arbitrary Rs 2 crore/Rs 5 crore/Rs 10 crore target.
How should investors divide retirement savings between SIPs, NPS, EPF/PPF, FDs and annuities?
There should not be one fixed percentage for everyone. The allocation should change with age and the distance from retirement.
A broad framework would be:
During accumulation — say 25–45
The priority should generally be growth + disciplined retirement contributions.
● SIPs/equity: long-term growth and inflation protection
● NPS: dedicated retirement corpus and disciplined long-term accumulation
● EPF/PPF: fixed-income component and capital stability
● FDs: liquidity and short/medium-term goals rather than the entire retirement corpus
Approaching retirement — say 45–60
Gradually increase the focus on capital preservation and income planning, while retaining sufficient growth assets.
After retirement
The portfolio should be divided into:
● near-term spending/low-volatility assets,
● medium-term income assets,
● long-term growth assets,
● and an appropriate guaranteed-income component.
The precise mix should depend on the person’s pension/annuity income, assets, liabilities and expected expenses.
The most important principle is not to treat NPS, EPF, SIPs or FDs as competing products. They solve different parts of the retirement problem.
What retirement risks are more important for today’s SIP/NPS investor than they were for the previous generation?
As per Goel, there are at least six risks that today’s investor needs to consciously manage:
1. Longevity risk
Retirement may last 25–30 years or more. PFRDA has highlighted rising life expectancy and the importance of protecting against longevity risk.
2. Inflation risk
A retirement corpus that looks large at 60 can lose significant purchasing power over the following decades.
3. Sequence-of-returns risk
Two investors can earn the same average return but experience very different outcomes depending on whether a market downturn occurs early or late in retirement.
4. Reinvestment risk
An FD maturing at 7% today may have to be reinvested at a substantially different rate in five years.
5. Behavioural risk
Investors may stop SIPs during market corrections or become excessively conservative after experiencing volatility, potentially damaging long-term accumulation.
6. Healthcare and dependency risk
Retirement expenses are not necessarily flat. Healthcare costs can rise disproportionately and retirement can extend much longer than initially expected.
The previous generation had risks too, but the modern defined-contribution investor has to actively manage more of these risks rather than receiving a predetermined pension.
Pension + FD vs SIP + NPS: Who faces bigger retirement risks?
The two retirees face different risk profiles rather than one being universally safer.
| Risk | Traditional pension + FD | SIPs + NPS, no DB pension |
| Market volatility | Relatively lower | Higher |
| Inflation | Pension may have inflation-linked relief, but FD income may not keep pace | Corpus can potentially grow with inflation through market exposure |
| Longevity | Pension provides strong protection, subject to scheme rules | Must actively manage corpus/annuity/drawdown |
| Reinvestment risk | High for the FD component | Lower if assets remain diversified |
| Sequence risk | Lower for pension income; present for investments | Significant around retirement |
| Liquidity | Generally good through FD/corpus | Depends on withdrawal/exit structure and asset allocation |
| Income certainty | Higher | Depends on withdrawal strategy and annuity allocation |
| Growth potential | Lower for a predominantly fixed-income portfolio | Higher potential, but not guaranteed |
| Behavioural risk | Relatively limited for pension income | Significant because investor controls asset allocation/withdrawals |
| Healthcare/large expenses | Depends on separate savings | Depends on size and liquidity of corpus |
So the first retiree’s biggest concern may be inflation, reinvestment and whether fixed-income assets maintain purchasing power.
The second retiree’s challenge is broader: market volatility, sequence risk, longevity, withdrawal discipline and converting a corpus into sustainable income.
This is ultimately the central change in retirement planning between the two generations: the older model was primarily pension-led, while the newer model is corpus-led.
That does not mean today’s generation is inherently less secure. It means retirement security has shifted from being largely an institutional promise to becoming a combination of disciplined accumulation, asset allocation and income planning.
PFRDA’s retirement framework itself emphasises starting early, compounding, inflation protection and balanced financial decisions as core elements of retirement preparedness.
Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.