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Pension Planning: All You Need to Know to Prepare for Your Financial Future

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Pension Planning: All You Need to Know to Prepare for Your Financial Future

No one wants to spend their entire life working or relying on social security programs for survival. We’re all aware of how vital pension planning is. However, we still struggle with questions such as when I should start, how much I should invest, and what age is best to say adieu to a hectic life and enjoy the peace of retirement.

So, to help you navigate this maze, we’ve created a comprehensive guide to pension planning. By the end of this article, you will have the answers to all of your retirement planning questions.

So, let us get on the wheels.

What is Pension Planning?

We’ll start our beautiful exploration journey by defining precisely what pension planning is. Pension planning is the process of preparing for a comfortable and secure life in retirement.

Pension planning begins with clearly defining your financial goals and then saving and investing money based on your needs and preferences. There are numerous factors to consider when planning your pension, which we will address later in this article.

To figure out a specific nest egg, consider your current income, expenses, assets, liabilities, life expectancy, inflation, tax benefits, and risk tolerance. Decide when you want to retire, how much income you will need, and what vehicles you will use to achieve the corpus required to live the life you want.

Why is pension planning important?

Now that you understand what pension planning is all about let us look into why it is such a trendy topic. Here are five reasons why pension planning is an inescapable part of your life:

  1. Helps you achieve your life goals

Whether you want to travel the world, pursue a hobby, or spend time with your loved ones, retirement planning can help you fund your dreams.

  • Have a steady source of income

By saving and investing your money wisely, you can create a retirement corpus that can generate regular returns and meet your expenses even when you are not working.

  • Gear up for  unexpected emergencies

You never know what life may throw at you, such as health issues, natural disasters, or family crises. Pensions can help you cope with these situations without compromising your financial security.

  • Reduce your tax liability

Effective pension planning reduces your tax liability and increases your net worth. You can grow your wealth by investing in multiple assets that can appreciate over time and help you save taxes.

  • Gives you peace of mind and happiness

By using the right pension planning, you can avoid financial stress, maintain your lifestyle, and contribute to the economy and social welfare.

Factors to Consider While Planning for Retirement

  1. Your retirement age and life expectancy
  • Start by asking yourself two questions: When do you want to retire? How long do you expect to live? The age at which you retire is entirely up to you. Some people want to stay active and work into their later years. Some want to retire early and enjoy the aspects of life that they skipped out on due to their busy work lives.
  • You can estimate your life expectancy based on your health, family history, and lifestyle and then save accordingly.

2. Effect of Inflation on Your Pension

Inflation is the rise in the average cost of goods and services over time. When inflation rises, it reduces the purchasing power of your money. So, to prevent inflation from eating up your retirement corpus, invest in assets that can generate returns higher than the inflation rate to preserve the value of your portfolio.

3. Don’t lose sight of tax liabilities

Remember this: Taxes will take a toll on your retirement corpus and pension. So, while retirement planning, keep an eye on your tax bracket, deductions, and exemptions. You should look for tax breaks and tax-efficient investments to lower your tax liability and increase your net worth.

4. Returns on Investment (ROI)

We invest to generate profits from our savings and investments. Furthermore, returns are determined by the risk you take and the time horizon of the asset classes you choose. To achieve your retirement goals, diversify your portfolio and devote yourself to long-term investments that balance risk and return. This will help you develop immunity to market fluctuations.

How to start pension planning?

Follow the steps below to start your pension planning right away-

Step 1: Select your retirement age

Your financial goals and responsibilities will influence the retirement age you set. You should consider your current health, life expectancy, lifestyle, and career goals. For instance, if you are career-oriented or have financial responsibilities, your retirement age will be higher than that of someone financially secure or satisfied with their career achievements.

Step 2: Set financial goals and form a budget.

You should calculate how much income you will require in retirement based on your estimated expenses, inflation, and tax rates. Keep your budget realistic, allowing you to save and invest a portion of your income regularly.

Step 3: Invest early for a peaceful retirement

Start as early as possible is the secret mantra to effective retirement planning. Compounding can help you boost your returns as time goes by. You should choose a retirement plan that suits your risk tolerance, time horizon, and financial goals.

Step 4: Compute your retirement corpus

Calculate how much money you’ll need to save by retiring to maintain your desired lifestyle. To calculate the future value of your savings, you can use a retirement calculator or consult a financial advisor. Because it is critical to consider your expected rate of return, inflation, and withdrawal frequency.

Step 6: Avoid avoidable expenses

You should reduce your debt, spend less, and avoid making unnecessary or impulsive purchases. To pay off your debts, use the descending order of interest. To put it another way, start repaying the loan with the highest interest rate first and work your way down to lower interest rates.

Step 7: Regularly review and track your plan

You should periodically review your retirement plan and make changes as needed. Don’t miss out on reviewing your insurance policies to ensure adequate health, life, and property coverage. You should also review your goals, budget, investments, and expenses to ensure they align with your changing needs and circumstances.

Best Investment Options For Retirement Planning

If you are covered by an old pension scheme and are eligible for a pension, you should still consider these investment options due to their high returns and tax-free status. If not, this list is exactly what you need.

Public Provident Fund (PPF)

  • PPF is a government-backed savings scheme that offers a fixed and guaranteed return, currently at 7.1% p.a.
  • Your money is locked in PPF for 15 years, and you can continue for 5-year blocks.
  • Partial withdrawals and loans are allowed only after certain conditions are met.
  • It is a safe and tax-free option but may not beat inflation in the long run.

National Pension Scheme (NPS)

  • NPS is a market-linked pension scheme that allows you to invest in different asset classes, such as equity, debt, and government securities, through various pension fund managers.
  • NPS offers two account options: Tier I and Tier II. Tier I account is mandatory and has a lock-in period till age 60, while Tier II account is optional and has no lock-in period.
  • You can choose between active and auto choices for your asset allocation.
  • You can also claim an additional tax deduction of Rs. 50,000 under Section 80CCD(1B) for your NPS contributions over and above the Rs. 1.5 lakh limit under Section 80C.
  • Returns in NPS are based on market performance. But if you start early with a long-term investing vision, you can beat inflation and generate good returns. 

Mutual Funds

  • Mutual funds are pooled investment vehicles that invest in various securities, such as stocks, bonds, gold, etc., depending on the fund’s objective and strategy.
  • Contrary to stocks, where you manage your risk, Mutual funds are managed by professional fund managers and regulated by SEBI.
  • Mutual Funds have various options to suit different risk profiles, time horizons, and goals. Depending on your investing tastes, you can choose different plans, such as growth, dividend, and systematic investment plans.
  • You can invest in mutual funds through lump sum or SIP mode.
  • You can also invest in ELSS (Equity Linked Savings Scheme) funds, which are tax-saving mutual funds with a lock-in period of 3 years and qualify for deduction under Section 80C.
  • Mutual funds can offer higher returns than fixed-income options but are also subject to market fluctuations and taxation.

Equities or Shares

  • Equity or shares are units of ownership in a company that entitle you to a proportionate share of its profits and assets.
  • They are traded on stock exchanges and their prices are determined by the demand and supply forces.
  • Shares can give you capital appreciation and dividends but are risky and volatile.
  • Shares can yield attractive returns only when you research the company, avoid short-term gains, study its financial and technical ratios, competitive advantage, etc., before investing.
  • You must also pay brokerage fees, transaction charges, and taxes on your share transactions.

Key Takeaways

  • Pension planning is a pressing topic that we must address. Systematic planning can help you meet your retirement objectives and secure your financial future.
  • Starting early, saving regularly, investing sensibly, and selecting the right pension plan will allow you to enjoy your golden years without financial worries.
  • However, pension planning is an ongoing process that must be reviewed and tweaked regularly in response to changing economic conditions. You cannot afford to ignore other factors that influence retirement planning, such as taxes, inflation, and healthcare costs.

To summarise, if you are unsure about pension planning, never hesitate to seek professional advice. Remember, it is never too late to begin pension planning, but the sooner you do it, the better.


  1.  How to cope with your health care bills after you stop working?

     One of the most difficult aspects of retirement is dealing with rising healthcare costs as we age.  
    To deal with these expenses, you can try these: maintain a healthy lifestyle, choose the right health insurance plan, save for medical emergencies, and look into other options such as government schemes, health savings accounts, and long-term care insurance.

  2. How to deal with inflation in retirement?

    To deal with inflation in retirement, you should adjust your budget, increase your income, and invest in inflation-hedging assets. Equity, real estate, commodities, inflation-linked bonds, and annuities are inflation-protective assets.

  3. How much do you need to put aside for your retirement?

    So, this is not a one-size-fits-all situation. The amount you need to save for retirement depends on factors like your current income, desired retirement income, life expectancy, expected rate of return, inflation rate, etc. Aim to save at least 10% to 15% of your annual income. Also, aim to retire with at least 25 times your annual expenses.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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