The National Pension System (NPS) has emerged as one of the popular retirement planning tools for both public and private sector employees in the country. Structured to promote sustained savings for retirement, NPS offers an appealing option for accumulating a pension fund.
If you have surpassed the age of 40 and are concerned about how to secure a pension through investment, the National Pension System may be a viable solution. A significant benefit of this financial instrument is that it imposes no restrictions on the amount you can invest. Let us explore the savings required to achieve a monthly pension exceeding Rs 5 lakh.
Understanding the NPS: What Makes It Unique?
The NPS is a government-backed retirement savings scheme. It offers you the opportunity to build a retirement corpus while enjoying tax benefits. One of its key features is its flexibility—it allows investors to select a combination of equity and debt investments according to their risk appetite.
One of the major attractions of the NPS is its low cost. The scheme has one of the lowest fund management charges among retirement schemes. This, combined with the power of compounding over a long-term horizon, makes the NPS an appealing option for investors who are looking to accumulate wealth for their retirement years.
Also Read: PPF Calculator: How Public Provident Fund can double your investment
Calculation with Examples
According to the NPS calculator, if you start investing Rs 1 lakh each month at the age of 40 and continue until you turn 65, with an anticipated annual return of 12% on your investment, you can achieve substantial financial growth. At retirement, if you allocate 55% of your accumulated corpus to purchase an annuity with a rate of 6%, you could secure a monthly pension exceeding Rs 5 lakh.
Investment Horizon
Adhil Shetty, CEO of Bankbazaar.com, suggests, “The earlier you start, the larger your retirement corpus will be. For example, someone starting at age 30 will have a larger corpus compared to someone starting at 40, even if the monthly contributions are the same. But if you increase your contribution, you can reach the target retirement corpus.”
Expected Rate of Return
In the example provided, the assumption is an annual return of 12%. While NPS funds, particularly those with a high equity allocation, have delivered strong returns in the past, there are no guarantees. It is essential to understand that market conditions can change and returns on NPS are subject to the performance of the underlying investments in equity, corporate debt, and government bonds.
Annuity Purchase and Rates
Annuity rates are influenced by prevailing interest rate trends and market conditions at the time of acquisition. In the aforementioned example, a 6% annuity rate is presumed; however, it is crucial to recognize that these rates may change. Diminished annuity rates may lead to monthly pension payments that are less than anticipated.
It is anticipated that these suggestions will assist you in making a more informed decision as you begin your investment in the National Pension System. If you are commencing your investment later in life and aspire to achieve a larger monthly pension, you should be prepared to commit to higher monthly contributions over an extended duration of 20 to 24 years.
