Generating a monthly pension of ₹1 lakh using the National Pension System (NPS) is achievable with proper financial planning, consistent contributions, and the power of compounding over time. Here’s how you can plan for it, including detailed calculations and an understanding of the risks and rewards involved.
Understanding NPS and Its Benefits
The National Pension System (NPS) is a government-backed, defined-contribution pension scheme in India that offers an attractive way to save for retirement. It is open to all Indian citizens between 18 and 70 years of age. NPS contributions are invested in a mix of equity, corporate bonds, and government securities, managed by professional fund managers. The returns are market-linked, meaning they depend on the performance of the chosen investment scheme.
Read this: National Pension System (NPS): A Simple Guide for Beginners
Tax Benefits: NPS also offers substantial tax benefits. Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C, and an additional ₹50,000 under Section 80CCD(1B), making it one of the most tax-efficient retirement plans in India.
How to generate 1 Lakh pension
Generating a pension of ₹1 lakh per month through the National Pension System (NPS) requires strategic planning, especially when considering different starting ages.
Below are calculations for individuals starting their NPS contributions at ages 25, 30, and 35, assuming a minimum of 40% investment in annuity upon retirement. These examples will give you an idea of how your starting age affects the required monthly contribution and the potential pension amount.
- Retirement Age: 60 years
- Annuity Rate: 6% per annum (assuming 40% of the corpus is invested in annuity)
- Investment Growth Rate: 8% per annum
- Annuity Purchase: 40% of the final corpus
- Pension Goal: ₹1 lakh per month
1. Starting at Age 25
- Investment Period: 35 years
- Monthly Contribution: ₹8,150
- Total Corpus at Retirement: ₹1.88 crore
- Annuity Purchased: ₹75.2 lakh (40% of ₹1.88 crore)
- Expected Monthly Pension: ₹37,600
- To achieve ₹1 lakh per month, a higher annuity investment or a longer investment period would be necessary, or starting with a higher monthly contribution.
2. Starting at Age 30
- Investment Period: 30 years
- Monthly Contribution: ₹12,000 (approx.)
- Total Corpus at Retirement: ₹1.97 crore
- Annuity Purchased: ₹78.8 lakh (40% of ₹1.97 crore)
- Expected Monthly Pension: ₹39,400
- If you start at 30, you need to increase your monthly contribution to achieve the desired pension. Alternatively, investing a higher percentage in annuity could help, but that would reduce the lump sum available at retirement.
3. Starting at Age 35
- Investment Period: 25 years
- Monthly Contribution: ₹18,000 (approx.)
- Total Corpus at Retirement: ₹2.03 crore
- Annuity Purchased: ₹81.2 lakh (40% of ₹2.03 crore)
- Expected Monthly Pension: ₹40,600
- With a later start at 35, your monthly contribution needs to be significantly higher to reach a similar pension goal. The shorter investment period means less compounding, which is why the contribution needs to increase.
Adjusting Contributions to Achieve ₹1 Lakh Pension
To reach a ₹1 lakh per month pension with a 40% annuity investment:
- At Age 25: You would need to invest around ₹22,000 per month.
- At Age 30: A contribution of approximately ₹28,000 per month would be required.
- At Age 35: This figure jumps to nearly ₹40,000 per month due to the reduced time horizon.
Risks and Rewards
Rewards
- Tax Efficiency: High tax savings make NPS a highly efficient retirement savings tool.
- Long-Term Growth: Market-linked returns and the power of compounding over a long period can build a substantial retirement corpus.
- Flexibility: You can choose your fund manager and adjust the equity-debt ratio based on your risk appetite.
Risks
- Market Risk: Since NPS investments are market-linked, returns are subject to market fluctuations, especially the equity component.
- Interest Rate Risk: The annuity rates at the time of retirement might be lower than expected, affecting the pension amount.
- Withdrawal Restrictions: NPS mandates purchasing an annuity with a part of your corpus, limiting liquidity.
Additional Considerations
- Contribution Amount: If you start later or expect lower returns, you may need to increase your monthly contribution to achieve the same pension.
- Annuity Rate Variations: Shop around for the best annuity rates at retirement to maximize your pension.
- Regular Monitoring: Keep track of your NPS portfolio and adjust your contribution or investment strategy as needed.
Key Takeaways
- Start Early: The earlier you start investing, the lower your monthly contributions need to be due to the power of compounding.
- Increase Contributions Over Time: If starting later, you must compensate by significantly increasing your monthly contributions.
- Consider Higher Annuity Investment: If you cannot meet the contribution target, investing more than 40% of your corpus in an annuity can help, though it will reduce your lump sum at retirement.
Conclusion
Planning for a ₹1 lakh per month pension through NPS requires careful consideration of your starting age, contribution amount, and the proportion of your corpus invested in an annuity. The earlier you start, the more manageable your contributions will be.
However, even if you start later, with disciplined saving and strategic investment, you can still achieve your retirement goals (NPS Trust)
