At age 35, a small investment in the National Pension System (NPS) can help you build a significant retirement fund, ensuring a steady monthly pension of Rs 2 lakh after 60. Here’s how you can achieve this financial goal.
Retirement planning can feel daunting, especially when you’re in your mid-30s and just starting to think seriously about long-term financial goals. The National Pension System (NPS) offers an excellent way to build a significant retirement fund over the years, with the added benefit of a comfortable monthly pension once you stop working. By starting early and contributing regularly, you can pave the way to a financially secure retirement. Here’s a simplified guide to how you can invest Rs 21,000 monthly in the NPS and eventually secure a pension of Rs 2 lakh per month.
Why Start Investing in NPS at 35?
Starting your NPS investment journey at the age of 35 allows you to maximize returns by capitalizing on compound interest over a long period. A steady monthly contribution of Rs 21,000 in the NPS plan can grow into a substantial fund by the time you reach 60, providing a solid financial cushion.
The National Pension System is designed as a long-term retirement savings scheme, regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It enables subscribers to invest in a mix of equities, corporate debt, and government bonds. The flexibility to choose your investment ratio allows you to adjust your risk tolerance according to your financial goals and timelines.
Building a Retirement Fund for Rs 2 Lakh Monthly Pension
To achieve a monthly pension of Rs 2 lakh, the goal is to accumulate a retirement corpus of Rs 2.77 crore by the age of 60. Here’s a breakdown of how it works:
- Invest Rs 21,000 Monthly:
Starting at age 35, contribute Rs 21,000 monthly to the NPS for 25 years. Assuming an annual return rate of 10%, your investment will grow to around Rs 2.77 crore by the time you turn 60. - Withdraw a Lump Sum and Buy an Annuity:
NPS regulations allow you to withdraw up to 60% of your total accumulated fund at retirement. The remaining 40% is then invested in an annuity plan.- Lump Sum Withdrawal: At retirement, you can withdraw about Rs 1.66 crore, which can be reinvested or saved as you see fit.
- Annuity Purchase: Use the remaining Rs 1.11 crore to buy an annuity plan, which will pay you a monthly pension.
- Earning from Annuity and SWP:
- Annuity Income: If your annuity plan provides a 6% annual return, you’ll receive approximately Rs 60,648 monthly.
- SWP Income: The Rs 1.66 crore lump sum can be invested in a Systematic Withdrawal Plan (SWP), generating an estimated Rs 1,39,993 monthly at a 10% return rate.
Together, this adds up to a monthly income of around Rs 2 lakh.
Monthly Contribution: Rs 21,000 for Rs 2 Lakh Pension
This investment strategy requires a monthly commitment of Rs 21,000. Over 25 years, this will allow you to build a retirement corpus that meets the Rs 2 lakh monthly income target. For those aiming for a more modest pension of Rs 1 lakh per month, a Rs 10,500 monthly NPS contribution should be sufficient, given similar growth assumptions.
Exploring NPS Investment Choices: Active vs. Auto Choice
NPS offers two main investment options: Active Choice and Auto Choice.
- Active Choice:
- This option allows you to actively choose your investment allocation between equities, corporate bonds, and government securities.
- Up to 75% of your contribution can be allocated to equities. However, after the age of 50, the equity cap gradually decreases by 2.5% each year.
- Active Choice is a good fit for investors who are comfortable making strategic decisions regarding their portfolios.
- Auto Choice:
- In Auto Choice, your NPS funds are automatically allocated among asset classes based on your age and risk profile.
- This option is ideal for investors who prefer a hands-off approach or lack experience with investment planning.
For a 35-year-old investor with a long-term view, Active Choice can potentially yield better returns due to higher equity exposure, especially if you’re comfortable with market fluctuations.
Calculating Returns and Risks
The estimated monthly pension of Rs 2 lakh is based on an assumed 10% annual return from NPS investments and a 6% return from the annuity plan. It’s important to note that these returns are projections and may vary depending on market conditions. NPS returns, like any market-linked investment, are influenced by economic factors, stock performance, and interest rates. While equities tend to offer higher returns, they also carry more risk compared to corporate debt or government securities.
Benefits of NPS for Retirement Planning
NPS is not only about accumulating wealth but also offers tax benefits under Section 80C and Section 80CCD(1B). Additionally, the scheme provides an affordable way to build retirement funds, making it accessible to a broader range of investors.
By committing to regular monthly investments, you can ensure a stable post-retirement income. With the right strategy and investment choice, NPS offers an effective solution for building a comfortable retirement fund and living independently during your later years.
Taking the first step at 35, even with a smaller investment amount, can yield significant results by the time you retire. Through steady contributions and smart planning, you can secure a monthly pension that matches your lifestyle and financial needs.
