How to get Rs 2 lakh monthly pension from NPS in 20 years Your returns from NPS will decide how much corpus you can accumulate. Let us say you have just turned 40. You have 20 years to accumulate a lump sum in NPS. If you want to earn a Rs 2 lakh pension per month from your NPS investment, here is how much contribution you must make now
Just turned 40 and looking for a tool to build a retirement corpus that can generate regular income in the future? Don't worry, we’ve got your back. The National Payment System (NPS) has emerged as one of the most popular tools for retirement planning and investment. Besides other asset classes like corporate debt and government debt, NPS also offers you the option to invest in equities which could give you attractive returns in the long run if you use it mindfully.There is no need for you to panic even when you are late in saving for your retirement. A little bit of planning and regular investment can still get you as much as Rs 2 lakh per month from NPS.
Also read: How to invest emergency corpus from where you can withdraw funds easily
Your returns from NPS will decide how much corpus you can accumulate. To understand how to use this government-backed scheme to get a regular pension of Rs 2 lakh per month, you need to know few of the rules.
NPS Withdrawal Rule: 40% annuity purchase mandatory
At present, an NPS subscriber cannot withdraw the entire accumulated corpus on maturity. You must invest a maximum of 40% of the total NPS corpus to buy an annuity plan from a life insurance company. This annuity amount will provide a regular pension after retirement. The remaining 60% can be withdrawn as a lumpsum. However, you have the option to use a portion of this lumpsum to buy an annuity. Thus, an NPS subscriber can use up to 100% to purchase an annuity.
How to invest in NPS to get Rs 2 lakh pension per month
Let us say you have just turned 40. You have 20 years to accumulate a lump sum in NPS. If you want to earn a Rs 2 lakh pension per month from NPS investment, here is how much contribution you must make now.
To get a pension of Rs 2 lakh per month, the total accumulated NPS corpus must be Rs 4.02 crore on maturity (i.e., age of 60 years) if we assume that the overall corpus will be able to generate 6% overall return after 20 years. It is mandatory to buy a 40% annuity. So, you will need to use Rs 1.61 crore to buy an annuity. You will have Rs 2.41 crore lumpsum at the of 60.
You will also invest the tax-free lumpsum amount either in a debt instrument or with a combination of debt and equity if the debt return is not sufficient to earn a monthly pension. Assuming, you get 6% yearly returns from your lumpsum amount. The annuity rate could also be 6% per annum.
If you use 40% of the total corpus to buy an annuity you will get a pension of Rs 80,398 every month from the annuity.
At 6% returns from a debt instrument, you will get Rs 1,20,597 per month from the lump sum amount.
You will get a total of Rs 2,00,995 pension per month from your investment.
How much do you need to invest in NPS to accumulate Rs 4.02 crore in 20 years?
As you start investing at 40, you need to put Rs 52,500 every month in NPS for the next 20 years as per the calculator on NPS website (npstrust.org.in/nps-calculator). On average you can have equity exposure of 50% and above, which can give you an attractive return over a long term period of 20 years. Assuming a 10% return per annum, the total NPS investment corpus will grow to 4.02 crore at the time of maturity.
NPS calculation: Assuming 6% returns per annum from lumpsum and annuity at 60
Starting age
Monthly NPS contribution
Total corpus at 60
Lumpsum value at 60%
Monthly pension from lumpsum at 6% p.a.
Annuity value at 40%
Monthly pension from annuity at 6% p.a.
Total monthly pension at 60
40
Rs 52,500
Rs 4.02 crore
Rs 2.41 crore
Rs 1,20,597
Rs 1.61 crore
Rs 80,398
Rs 2,00,995
The figures are indicative. Original returns and figures from NPS will vary. Source: NPS website
NPS Investment: A higher return may change the pension dynamics
The returns from NPS will vary depending on the market conditions. Either you get a higher return than 10% during your investment phase or you expect to get higher return from your lumpsum during the retirement phase. Considering these scenarios, a little lower investment can generate more returns as well.
If you are confident of generating a higher return of 9% on lumpsum amount during the pension phase, then you will need a much lower corpus of Rs 3.14 crore to get a monthly income of Rs 2 lakh. Out of this, lumpsum will be Rs 1.88 crore and the annuity amount will be Rs 1.26 crore. If you invest the lumpsum amount in instruments that offer 9% returns every year, you will get a monthly pension of Rs 1,41,271 from it. Assuming 6% returns from the annuity amount, you can generate a monthly pension of Rs 62,787 from it. In this case, your total pension will be Rs 2,04,058 per month.
Say you put Rs 41,000 every month into NPS. At 10% returns per year, it will grow to Rs 3.14 crore at the time of maturity. In case, your returns are higher during accumulation phase you will need much lesser monthly contribution. For instance, if you expect an overall return of 11% then you will need only Rs 36,000 monthly investment to reach to a corpus of Rs 3.14 crore.
NPS Calculation: Assuming 9% returns per annum from lumpsum and 6% returns per annum from annuity at the age of 60
Starting Age
Monthly NPS contribution
Total corpus at 60 (in Cr)
Lumpsum Value at 60% (in Cr)
Monthly pension from lumpsum at 9% return p.a.
Annuity value at 40%
Monthly pension from annuity at 6% p.a.
Total monthly income at 60
40
Rs 41,000
Rs 3.14 crore
Rs 1.88 crore
Rs 1,41,271
Rs 1.26 crore
Rs 62,787
Rs 2,04,058
The figures are indicative. Original returns and figures from NPS will vary. Source: NPS website
Now, the returns from the annuity income will also vary, depending on the market conditions. If the returns from annuity will be at 5% after 20 years, then you need to accumulated bigger a corpus.
NPS Calculation: Assuming 6% returns per annum from lumpsum and 5% returns per annum from annuity at the age of 60
Starting Age
Monthly NPS contribution
Total corpus at 60 (in cr)
Lumpsum value at 60% (in cr)
Monthly Pension from lumpsum at 6% p.a.
Annuity value at 40%
Monthly pension from annuity at 5% p.a.
Total monthly income at 60
40
Rs 56,000
Rs 4.29 crore
Rs 2.57 crore
Rs 1,28,637
Rs 1.71 crore
Rs 71,465
Rs 2,00,102
The figures are indicative. Original returns and figures from NPS will vary. Source: NPS website
For those who are investing in NPS at 40, Vishal Dhawan, a SEBI-registered RIA says, "Understand that there are multiple managers and multiple underlying assets like equity, corporate bonds, government securities, and the mix can be varied and changed. Thus, it needs to be reviewed at least once a year."
Keep in mind that you need to allocate for equity schemes to generate around 10% returns. Depending on your risk appetite and risk allocation, the returns from NPS will vary.
NPS Investment: Auto Choice vs Active Choice
As an investor, you get two options while investing in NPS — active and auto choice. In active choice, the NPS subscriber can decide the allocation or ratio in which his NPS corpus is to be divided — equity, corporate debt, government debt, and alternative investment funds. Under the Active Choice option, you can invest up to 75% of the total corpus in equity. However, after 50, the upper limit of equity allocation starts reducing by 2.5% every year. So, the maximum amount that can be invested in equity goes to 72.5% at age 52, 70% at 52, 67.5% at 53 to finally 50% by the age of 60. You can have a maximum of 100% in government bonds or corporate bonds.
Under the Auto Choice option, there are three Life Cycle Funds — Aggressive Life Cycle Fund, Moderate Life Cycle Fund, and Conservative Life Cycle Fund available for the investors. Under each fund, your investment allocation will be done based on a pre-decided formula. With every passing year, the exposure to equity and corporate debt reduces gradually. Depending on your risk appetite, you can choose one fund. You don't need to actively take part in portfolio rebalancing.
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This story originally appeared on: India Times - Author:Faqs of Insurances
