National Pension System Calculation: While having a Rs 1 lakh/month pension may be sufficient for individuals currently, the same amount may not be enough for a good post-retirement life after the next 20-25 years due to inflation.
Assuming the average annual inflation of 6%, you will need more than Rs 3.2 lakh/month to maintain the same standard of living that a retired person can maintain now for just Rs 1 lakh. After 25 years, you will need over Rs 4.2 lakh for the same standard of living and more than Rs 5.7 lakh after 30 years.
Due to inflation, it is clear that the cost of living will continue to increase as you grow. Therefore, it becomes important to work on a proper retirement plan in consultation with a financial advisor from the very start of your career.
It is always better to start investing for retirement/pension as early as possible, preferably in the 20s. The sooner you start the larger your retirement corpus or pension wealth will become. You can also use the National Pension System (NPS) to start investing in your pension goals.
Government-backed NPS is one of the most popular investment options for retirement planning. Interestingly, the NPS calculator on the official NPS Trust website shows that a Rs 5000/month contribution to the NPS Tier-1 account from the age of 25 could result in a monthly pension of over Rs 1.6 lakh. However, there are certain assumptions:
- You start investing from the age of 25 and continue till 60 years.
- The expected return on your investment is 12%. If the expected return drops to 8% then you will be able to get over Rs 57,000 as a monthly pension, according to the calculator
- The expected annuity rate is 6%; and
- You purchase an annuity for 100% of the total retirement corpus generated in 35 years.
Interestingly, if you invest Rs 10,000 per/month from the age of 25 then you would be able to get a pension of Rs 3.2 lakh provided all other conditions mentioned above remain the same. You can increase your contribution during the course of investment for generating a higher retirement corpus.
As per NPS rules, a subscriber at the time of attaining the age of 60 years can purchase an annuity up to 100% of his accumulated pension wealth.
The ultimate return from the NPS would also depend on the choice of the pension fund and how they perform during the course of your investment journey. Till now many funds under NPS have returned up to 12%. But such high returns cannot be guaranteed for the future as well.
Who can open NPS account?
The scheme is available for all citizens of India, including non-residents. (Read NPS Contribution Rule for Private Sector Employees)
“Any class of individuals (who fall under the citizen model), irrespective of whether these individuals are Indian and non-Indian residents in the age bracket of 18-70 years, working under the state or central Government or any private firm are eligible to be NPS subscribers,” says Ajit Kumar, Chief Strategy Officer, KFintech.
(Disclaimer: The above article is for information purposes only. The above calculation and illustration of figures are indicative only and not on an actual basis. Investments under NPS are subject to market risk. Please consult a professional retirement advisor to make the most of your NPS investment).