The power of compounding in the long-term is perhaps the most potent mathematical model from which instruments such as NPS (National Pension System) draws its strength. In fact, when it comes to retirement planning, it is one of the most potent tools in the hands of every Indian citizen.
The most significant fact is that every Indian citizen is eligible to open an account. It create a corpus using voluntary contributions from an individual and it does not matter whether the person is employed or not. The power of long-term compounding makes it possible to create a big amount with a small regular contribution. Let’s see the compounding power with a humble investment of 100 a day.
What is NPS and its benefits
Let’s take the help of a NPA calculator to find out the immense benefits that the NPS can deliver for an individual, provided he/she keeps up the investment in a disciplined way. These calculators are available for free and online. Now, for the sake of calculation, let’s make a few assumptions. The lowest age when an adult can open an NPS account is at 18. Let’s take the example of a person who has turned 18 in 2024. Let’s settle for the conservative (LC25) investment model – it limits investment in equity to only 25% of an individual’s contributions. An amount of Rs 100 a day makes Rs 3,000 a month. Let him/her invest till 60 years. We will also assume a 5% (annual) rise in contributions. In this case the entire corpus at retirement would stand at Rs 2.82 crore. If the person takes 40% for annuity, he/she would get a lumpsum of Rs 1.69 crore at 60. The rest Rs 1.13 crore will be used to pay a monthly pension from the age of 60.
How to get Rs 50,000 pension per month in NPS
A simple calculator will tell you that even with a 6% return on the Rs 1.13 crore that has been reserved for annuity, the pension will be around Rs 56,000, or well above Rs 50,000 a month. Now think of a situation where the above investor is not in a position to raise his/her monthly contribution. Even if the investment remains steady at Rs 3,000 a month, it will generate a total corpus of Rs 1.57 crore. If one takes 60% as lump sum, he/she would get Rs 94.48 lakh at 60. A amount of Rs 63 lakh would be reserved for paying pension every month.
The National Pension System, or NPS, is a wonderful instrument that is designed to create a big corpus for post-retirement years harnessing the power of long-term compounding. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
