The majority of young professionals sideline retirement planning during the early stages of their careers, despite knowing it remains crucial for long-term financial security. They do not take retirement planning initiative not because there is a deficiency of trusted schemes; they just do not bind themselves to a long-term investment discipline. However, if they start investing in this direction, then it could be highly rewarding for them in old age. The government-backed scheme like the National Pension System (NPS) offers a reliable path toward a stress-free retirement.
Let’s assume a young professional starts a monthly investment of Rs 5,000; what could your financial future look like? Let’s break down the math to see how your potential pension grows based on your starting age.
NPS Rules
Before understanding the calculations, know the two most important rules of NPS: the first is that an NPS account matures at age 60. The second one is related to withdrawal. At age 60, the subscriber can withdraw a maximum of 60 per cent of the total fund in a lump sum, which is completely tax-free.
At maturity, you need to invest the remaining 40 per cent in purchasing an annuity (pension plan), which provides you with a monthly pension.
Also Read: Indo-MIM Shares Make Impressive Debut, List Over 44% Above IPO Price
Rs 5,000 Monthly: NPS Calculation
Suppose an employee starts investing Rs 5,000 every month and continues till the age of 60. Let’s assume an estimated annual return of 10 per cent and 6 per cent interest on your annuity (pension) after retirement.
Investment Age | Estimated Corpus at 60 Years | 60% Lump Sum | 40% Annuity | Estimated Monthly Pension |
|---|---|---|---|---|
35 Years | Rs 65 lakh | Rs 39 lakh | Rs 29 lakh | Rs 15,200 |
30 Years | Rs 1.13 crore | Rs 67.8 lakh | Rs 45.2 lakh | Rs 26,300 |
25 Years | Rs 1.90 crore | Rs 1.14 crore | Rs 76 lakh | Rs 44,300 |
Key Benefits of NPS
1- Long-term investment for retirement
2- Government-regulated investment option
3- Tax benefits also available:
4- Option to invest in both equity and debt
5- Regular pension facility after retirement
A few things you need to keep in mind before initiating the retirement planning journey with NPS: Return rates are not guaranteed, and final corpus depends on market performance. Annuity rates may change from time to time, so the actual pension may differ from the estimate that we have calculated above. The pension amount also depends on the annuity company and plan chosen.