NPS Calculator: The National Pension System (NPS) has gained recognition as a prominent retirement planning instrument for employees in both the public and private sectors across the nation. It is specifically designed to promote long-term savings for retirement, offering an effective means to accumulate a pension corpus.
For individuals seeking to secure a pension through investment, the NPS presents a feasible option. A notable advantage of this financial vehicle is the absence of limits on the investment amount. Let us examine the savings necessary to attain a monthly pension exceeding Rs 5 lakh.
What Makes NPS Unique?
The NPS is a government-supported retirement savings initiative that enables individuals to create a retirement corpus while benefiting from tax advantages. A significant characteristic of the NPS is its flexibility, allowing investors to choose a mix of equity and debt investments based on their risk tolerance.
Another compelling aspect of the NPS is its cost-effectiveness. The scheme boasts some of the lowest fund management fees among retirement plans. This, coupled with the benefits of compounding over an extended period, renders the NPS an attractive choice for those aiming to build wealth for their retirement years.
Also Read: SIP Calculator: How much Rs 5,000 monthly investment will grow in 20 years?
Calculation with Illustrations
Let’s understand the same with an example. Suppose you are 30-year old and you start saving Rs 39,000 per month in your NPS account, continuing this until you reach the age of 65. That means your total contribution will be spread over 35 years. With an expected annual return of 12% and 40% of your corpus going toward an annuity with an anticipated 6% return, you could expect a monthly pension of slightly over Rs 5 lakh through your NPS investment.
Now, let’s consider what happens if you start investing at the age of 40. If you contribute Rs 1.35 lakh per month until you turn 65, making a total contribution over 25 years, with an expected return of 12% and 40% of the corpus invested in an annuity at a 6% rate, you would still manage to secure a monthly pension of slightly over Rs 5 lakh.
You would need a bigger investment amount at age 40 as your total contribution years will be reduced to only 25 years. For a bigger pension amount, you would need to invest a much higher amount per month. Based on your income and other liabilities, you can take this call.
Investment Duration
Adhil Shetty, CEO of Bankbazaar.com, emphasizes, “Initiating your investments earlier will result in a more substantial retirement corpus. For instance, an individual who starts at age 30 will accumulate a larger corpus than one who begins at 40, even if both contribute the same monthly amount. However, by increasing the monthly contribution, one can still achieve the desired retirement corpus.”
Anticipated Rate of Return
In the aforementioned example, a 12% annual return is assumed. Although NPS funds, especially those with a significant equity component, have historically provided strong returns, there are no assurances. It is crucial to recognize that market dynamics can fluctuate, and the returns on NPS are contingent upon the performance of the underlying investments in equity, corporate debt, and government bonds.
Annuity Acquisition 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 vary. A decrease in annuity rates could lead to lower monthly pension payments than anticipated.
It is hoped that these insights will assist you in making a more informed decision when you begin investing in the NPS. It is essential to consider that if you are starting later and aspire to achieve a higher monthly pension amount, you should be prepared to make larger monthly contributions over an extended period of 20 to 24 years.