Category: Retirement Planning

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Budget 2016 has proposed a significant change in the taxation laws for National Pension Scheme (NPS). It has been proposed by the finance ministry to make 40% of your lump sum withdrawal to be tax exempt at the time of your retirement i.e. as you attain 60 years of age. But, does it make any sense to invest in NPS post this amendment or should you continue investing in equity mutual funds or PPF for your retirement years?

We all know that our contribution up to Rs. 50,000 in NPS provides us tax deduction under section 80CCD (1B). Unlike investments eligible for tax deduction u/s 80C, 80CCD (1B) provides an exclusive tax benefit for NPS. So, if you do not contribute in NPS, you need to pay tax as per your respective tax slabs. So, should you save tax by investing in NPS or just pay tax and then invest the remaining amount in equity mutual funds, PPF or debt mutual funds for wealth maximisation?

Honestly speaking, it is not an easy decision to take. To come to a conclusion, I’ll do a couple of comparative analysis here – one, comparing an investment in Equity Mutual Funds with NPS and the second one, comparing an investment in PPF with NPS. We will also have to make certain assumptions here based on which this analysis would come to a conclusion and you are most welcome to agree or disagree with my assumptions here because I am as human as you are and that is why there is enough scope of me committing mistakes as bad as anybody else on this earth.

Here are the assumptions I have made in this analysis:

• You are 35 now and would retire after 25 years from now.
• You are in the 30% tax bracket and will have to pay Rs. 15,450 as tax in case you decide not to invest Rs. 50,000 in NPS.
• Equity Mutual Funds would generate on an average 13% annual returns for the next 25 years.
• PPF would generate on an average 8.1% annual returns for the next 25 years.
• NPS with 50% contribution towards equity, 25% contribution towards Government Debt and 25% contribution towards Corporate Debt would generate on an average 10.375% annual return for the next 25 years. To provide more clarity here, I have assumed 12% annual returns from equity, 8% annual returns from government debt and 9.50% annual return from corporate debt.

So, should you invest in NPS for saving Rs. 15,450 in tax?

Scenario I – Say No to NPS in the present scenario, as it is not advisable to invest in NPS even with the exclusive tax benefit it enjoys u/s 80CCD (1B). Your investment of Rs. 34,550 in diversified equity funds should result in a higher retirement corpus for you as compared to Rs. 50,000 invested in the NPS. Here is what you’ll have in your retirement corpus at the end of 25 years from now:

Portfolio I – NPS – 50% of Rs. 50,000 invested in equity index, 25% in Government securities and 25% in corporate debt – Retirement Corpus Rs. 57,43,171

Portfolio II – Equity Mutual Funds – 100% of Rs. 34,550 invested in diversified equity mutual funds – Retirement Corpus Rs. 60,75,621

Portfolio III – PPF – 100% of Rs. 34,550 invested in PPF – Retirement Corpus Rs. 27,70,607

So, the above calculation clearly shows that investing in diversified equity mutual funds would generate the highest retirement corpus for you, even after paying 30% tax + 0.90% education cess on your taxable income over and above Rs. 10 lakh.

But, there are certain points which you need to keep in mind here which are in favour of NPS. Firstly, from taxation point of view, I think the present situation is not the best one for NPS and it could only improve from hereon. There is still a lot of scope of improvement for making NPS a better product to invest in. Also, I think the present taxation laws are already highly favourable for equity mutual funds. So, let us have a look at some other scenarios and whether it is a ‘Yes’ or a ‘No’ for NPS in those scenarios.

Scenario II – Say No to NPS, if you are in the 20% or lower tax brackets. You should rather invest in equity mutual funds to generate a healthy corpus for your retirement years.

Scenario III – Say No to NPS, even if you think this government or some other government will increase the exempt portion of your lump sum withdrawal in NPS from the current 40% to 100% or any percentage between 40% and 100% during the next 25 years.

Scenario IV – Say Yes to NPS, if you believe in the theory of “one bird in hand is better than two in the bush”. If you decide not to invest in NPS to save Rs. 15,450 today, you’ll have to pay it to the government and you’ll be left with Rs. 34,550 only to invest. With NPS, your first tax outgo will happen when you retire at the age of 60. Then also, if you withdraw 40% of your retirement corpus as lump sum, it is tax-free and invest the remaining 60% for buying an annuity, you are not required to pay any tax on that 60% as well. You’ll be required to pay tax only on the annuity income you would receive on your investment.

On the other hand, if you decide not to invest in the NPS, you’ll have to pay a tax of Rs. 15,450 to the government and your investment of Rs. 34,550 in equity mutual funds will take a long 25 years to beat NPS as far as a higher retirement corpus is concerned.

Scenario V – Say Yes to NPS, if you fall in the 30% tax bracket and you think this government or some other government will make long term capital gains (LTCG) on equity mutual funds taxable anytime during the next 25 years. Even a 10% LTCG tax on equity mutual funds will make NPS a better retirement product to invest in.

Scenario VI – Say Yes to NPS, if you are hopeful that this government or some other government would allow you to invest more than 50% of your Rs. 50,000 in equity portion of NPS. Personally I think there should an option allowing you to invest 100% of your money in equity. That would make NPS an attractive investment for me to save tax.

Scenario VII – Say Yes to NPS, if you are hopeful that this government or some other government would give you the liberty to invest 60% of your lump sum withdrawal anywhere you want and make it tax exempt as well.

Scenario VIII – Say Yes to NPS, if you are a conservative investor and don’t want 100% of your investment to be made in equities. With NPS, even 50% of your investment in equity index would result in a healthy retirement corpus which should be very close to the expected retirement corpus with 100% investment in equity mutual funds.

NPS vs. Equity Mutual Funds vs. PPF – Other Factors

There could be other such scenarios based on which your decision to invest in NPS could change. If you think I have missed any such significant scenario, then please share it here, I’ll incorporate that also to make it an even more comprehensive analysis.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

88% of India’s total labour force of 47.29 crore belongs to the unorganised sector, in which the workers do not have any formal provision of getting a regular pension payment on retirement. Moreover, due to increasing labour wages and better medical facilities, these people also face a risk of increasing longevity. So, this work force would require some kind of assured income guarantee to sustain itself in the coming years.

Launching Atal Pension Yojana (APY) from June 1, 2015

To encourage workers in the unorganised sector to voluntarily save for their retirement, the government of India will be launching a new scheme, called Atal Pension Yojana (APY), from 1st June, 2015. Finance Minister Arun Jaitley announced this scheme in his budget speech on February 28th.

This scheme will replace the UPA government’s Swavalamban Yojana – NPS Lite and will be administered by the Pension Fund Regulatory and Development Authority (PFRDA). The benefits of this scheme in terms of fixed pension will be guaranteed by the government and the government will also make contribution to these accounts on behalf of its subscribers.

Under this scheme, a subscriber would receive a minimum fixed pension of Rs. 1,000 per month and in multiples of Rs. 1,000 per month thereafter, up to a maximum of Rs. 5,000 per month, depending on the subscriber’s contribution, which itself would vary on the age of joining this scheme.

The minimum age of joining this scheme is 18 years and maximum age is 40 years. Pension payment will start at the age of 60 years. Therefore, minimum period of contribution by the subscriber under APY would be 20 years or more.

The Central Government would also co-contribute 50% of the subscriber’s contribution or Rs. 1000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years, i.e., from 2015-16 to 2019-20, who join the NPS before 31st December, 2015 and who are not income tax payers. The existing subscribers of Swavalamban Scheme would be automatically migrated to APY, unless they opt out.

Who is eligible for Atal Pension Yojana?

Any Citizen of India, aged between 18 years and 40 years, who has his/her savings bank account opened and also possesses a mobile number, would be eligible to subscribe to this scheme.

Government Funding – Indian Government would provide (i) fixed pension guarantee for the subscribers; (ii) would co-contribute 50% of the subscriber contribution or Rs. 1,000 per annum, whichever is lower, to eligible subscribers; and (iii) would also reimburse the promotional and development activities including incentive to the contribution collection agencies to encourage people to join the APY.

Who is eligible for Government Co-Contribution in Atal Pension Yojana?

Subscribers of this scheme, who are not covered under any other statutory social security scheme and are not income tax payers, would be eligible for the government’s co-contribution of up to Rs. 1,000 per annum.

Social Security Schemes which are not eligible for Government Co-Contribution

• Employees’ Provident Fund (EPF) & Miscellaneous Provision Act, 1952
• The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948
• Assam Tea PlantationProvident Fund and Miscellaneous Provision, 1955
• Seamens’ Provident Fund Act, 1966
• Jammu Kashmir Employees’ Provident Fund & Miscellaneous Provision Act, 1961
• Any other statutory social security scheme

Minimum/Maximum Pension Payable – This scheme will pay a minimum pension of Rs. 1,000 per month and a maximum pension of Rs. 5,000 per month, depending on the subscriber’s own contribution per month.

Minimum/Maximum Period of Contribution – As the minimum age of joining APY is 18 years and maximum age is 40 years, minimum period of contribution by the subscriber under this scheme would be 20 years and maximum period of contribution would be 42 years.

Atal Pension Yojana – Contribution Period, Contribution Levels, Fixed Monthly Pension and Return of Corpus to the Nominees of Subscribers

Internal Rate of Return (IRR) – Thanks to the government funding of Rs. 1,000 per annum per subscriber account for 5 years, your account would generate an IRR of approximately 0.66% per month or 8% per annum. This pension amount per month is fixed and the government has made it clear that if the actual returns on the pension contributions are higher than the assumed returns, such excess return will be credited to the subscribers’ accounts, resulting in enhanced pension payment to the subscribers.

Minimum Contribution – A subscriber aged 18 years will have to contribute a minimum of Rs. 42 per month in order to get Rs. 1,000 pension per month starting 60 years of age. For a 40 years old subscriber, his/her minimum contribution would be Rs. 291 per month. The contribution levels would vary and would be low if subscriber joins early and increase if he joins late.

Maximum Contribution – A subscriber aged 40 years will have to contribute Rs. 1,454 per month in order to get Rs. 5,000 pension per month starting 60 years of age. For a 18 years old subscriber, his/her contribution for Rs. 5,000 monthly pension would be Rs. 210 per month.

Can I increase or decrease my monthly contribution for higher or lower pension amount?

The subscribers can opt to decrease or increase pension amount during the course of accumulation phase, as per the available monthly pension amounts. However, the switching option shall be provided only once in a year during the month of April.

What will happen if sufficient amount is not maintained in the savings bank account for contribution on the due date?

Non-maintenance of required balance in the savings bank account for contribution on the specified date will be considered as default. Banks are required to collect additional amount for delayed payments, such amount will vary from minimum Re. 1 to Rs. 10 per month as shown below:

(i) Re. 1 per month for contribution upto Rs. 100 per month

(ii) Rs. 2 per month for contribution upto Rs. 101 to 500 per month

(iii) Rs. 5 per month for contribution between Rs. 501 to 1,000 per month

(iv) Rs. 10 per month for contribution beyond Rs. 1,001 per month.

Discontinuation of payments of contribution amount shall lead to following:

After 6 months account will be frozen.

After 12 months account will be deactivated.

After 24 months account will be closed.

Subscriber should ensure that the Bank account to be funded enough for auto debit of contribution amount. The fixed amount of interest/penalty will remain as part of the pension corpus of the subscriber.

Post-Retirement Rate of Return – Considering a retirement corpus of Rs. 1.7 lakh and monthly pension of Rs. 1,000, this scheme is going to generate a return of 0.59% per month or 7.1% per annum for its subscribers. I think this return is also on a lower side.

Nomination Facility – This scheme will also provide the nomination facility to its subscribers. In case of the subscriber’s death after attaining 60 years of age, the whole corpus generating the pension income to the subscriber would be returned back to the nominee of the subscriber. In case of untimely death of the subscriber before 60 years of age, the balance would be returned back to the nominee of the subscriber.

Where to open APY Accounts – You need to approach points of presence (PoPs) and aggregators under existing Swavalamban Scheme. These agencies would enrol you through architecture of National Pension System (NPS).

Points of Presence & Aggregators

Application Form – Here you have the links to the application form for subscribing to Atal Pension Yojana – Application Form in English – Application Form in Hindi

I think a subscriber should opt for a minimum monthly contribution of around Rs. 167 or so, which would make it approximately Rs. 2,000 annual contribution. 50% of Rs. 2,000 i.e. Rs. 1,000 would be contributed by the government as well. So, the subscriber will get the maximum benefit of government funding.

As mentioned above, the scheme would start from June 1, 2015. So, interested people will have to wait till then to open an account. If you have any other query regarding this scheme, please share it here.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Application Form in English

Application Form in Hindi

This is a guest post written by Manikaran Singal who is a certified financial planner and runs a personal finance blog - Good Moneying.

Retirement is very important and critical stage in one’s financial life. This stage can be made more enjoyable where you relax, spend time with family, pursue hobbies if you have properly planned for that. But it can be most horrifying phase also where your regular income stream is no longer available, with no pension provision and where you have not saved enough to take care of your retirement needs.  Due to the various challenges and risks associated with retirement, we recommend retirement planning should be given its due importance and starts as soon as possible.

Retirement Planning works in 3 steps – Accumulation – Preservation-Distribution.

Accumulation is the stage where we invest to generate a decent corpus which is assumed to take care of us during retirement years. This accumulation we do till retirement.

In Preservation stage we become cautious about our accumulated corpus and we start coming out of risky asset classes and start shifting the corpus into debt, though savings doesn’t stop during this stage also, as our regular income stream is intact.

Distribution is the stage when we make arrangements to use the corpus through interest, dividends and withdrawing capital which we have accumulated.

In the complete retirement planning, distribution is the most important of all, as all our efforts of accumulation and preservation were directed towards this stage only. With a regular income stream no longer available, the savings made over one’s working years now have to provide for all needs. Now your investments need to create a paycheque for you. In accumulation and preservation stages the mistakes can be ignored as you were getting regular income, but at distribution stage, small mistakes can cost huge.

Through this article, I will be discussing with you on the distribution stage of retirement planning and how you can plan your investments once retired.

1. First step is to prepare you on the risks front. Like :

a)     Longevity risk: We don’t know for how long we are going to live. Whatever life expectancy you have assumed during accumulation stage may not be correct. If you outlive that age and not used your corpus judiciously you may find yourself in financial soup.

b)     Health risk: At this age probability of health problems is much more. We don’t know till when health remains favorable on our side. And when it gets unfavorable how much of our accumulated corpus it may wash away.

2.     Have a look at your expenses.

This is very important as the ultimate target is about to generate comfortable income stream from the corpus to meet the basic and desired expenses easily. Here you may divide your expenses in 4 parts: Basic/desired/on dependents if any/Loan EMIs if any. Basic would include the family’s general and unavoidable expenses which may include the family gifts on various festivals/occasions, desired is what you want to do after retirement like going on annual or bi annual vacations, pursuing some hobby, some charitable or religious activity etc., On dependents means…situations where children are still studying or are not yet settled in life etc. and Loan EMIs.

3.     Investment Options.

When you have calculated how much is required, now is the time to look out for the options where you may park the lump sum amount to start getting regular income. Here one thing has to be noted that one should not ignore the growth aspect in investments and should give equal importance to that. To add to it, one should not get into wrong products with the lure of making fast money in the name of growth. Just reminding you again that mistakes made at this stage of life may prove very costly.

Make 3 investment buckets by investing corpus in different percentages.

Basic Bucket (50% -60%): Looking at the monthly requirement and pension inflow if any, one has to plan to fulfill the gap, for which one may use the products like Post Office Monthly Income scheme, Senior Citizens savings scheme , bank fixed deposits with monthly/quarterly pay-out options, Immediate annuity etc. I mean use those products which can supplement your monthly inflow. But here do keep in mind the taxability aspect also. All the so called safe instruments are taxable. So where the taxation crosses the acceptability criteria, then you may use Mutual funds Monthly income plans or park the amount in debt mutual funds and start systematic withdrawal plan, but please note in the latter you are withdrawing the capital part of corpus which should be last resort.

Health Bucket (10%-15%): After arranging for your current monthly requirement, put some percentage of your corpus into debt mutual funds or cumulative fixed deposits as a health fund which will take care of your those medical emergencies where expenses jumps over health insurance coverage.

Growth Bucket (20%-25%): Put the balance corpus or at least 20% of the total corpus in equity oriented Mutual funds diversified or index, to cope up with the inflation aspect and After every 5^th year transfer the growth portion into the basic bucket, so the monthly income can be supplemented and put it in line with the increased expenses.

Some Do’s and don’ts after Retirement.

1. Do review your financial situation every year.
2. Do buy adequate health insurance coverage for yourself and your spouse. Count the annual premium in the basic expenses.
3. Don’t buy or gift any investment product to any of your family member other than you or your spouse. Avoid gifting child plan to grandchildren etc. Don’t part with your savings in your lifetime. You will be soft emotionally gullible target to the sellers. So beware.
4. Do keep working even after retirement.

Shocked!! But in many cases it becomes inevitable especially when you still have dependents, or paying Loan EMIs. The idea is not to enter retirement phase with the burden of Debt and dependents, and not to use the nest egg on these areas. Also please understand that stock trading is not working.

1. Do take good care of your health. If at all you have any health problem better to take proper treatment. Many times I have seen people ignoring the health aspects due to the finances involved in the treatment. But please understand that your health is equally important for your wealth.
2. Don’t overspend in retirement if you have not over invested while working.
3. Don’t put your retirement corpus into Real estate due to the illiquid and unregulated nature of investment.

Retirement planning includes much more than just investing. It needs some behavioral adjustments also. The ultimate goal is steady, dependable and lasting income. With careful planning we can balance the needs of inflation protected income and long term growth during retirement.

For some reason, lately,  there have been a lot of questions about retirement planning and what to do with the money you get after retirement, and I think this topic deserves a mini series. Today, I’m going to write about three things that have been on my mind about this. Before I begin, for context, here is the full comment that prompted this post.

biswas July 10, 2012 at 7:37 am [edit]

There are many articles on how to plan for retirement.It will be nice if you can discuss on how to plan once one is retired.I am likely to retire in couple of months.I will receive a large lump-sump amount.I don’t know what to do except for FD.An article on this topic will really be appreciated.

As someone whose retirement is still a few decades away it is hard for me to really get into the shoes of someone who is retiring in a couple of months, so I’m going to write about three lessons I’ve learned from my elders who have already retired and made some good and bad financial decisions.

1. Don’t seek excitement in the stock market: A few years ago when online trading had still not caught on, it was quite common to go and sit in your broker’s office and execute trades. I used to go to my grandpa’s broker at the time and was surprised at how many retired folks “play” the market. In the end, none of them made any money, and most lost quite heavily, so if you’re seeking excitement in the stock market, that’s the last thing you want to do with your retirement savings.

2. Lock in your money in big investments: Someone in our family who was retiring soon told us over dinner that his elder brother who retired many years before him gave him this advice, and I think this is perhaps relevant to a lot of families.

His elder brother told him that over the years his retirement savings had been eaten away by giving small gifts and loans to people in need and the fact that people knew he had the money, made them approach him and talk him into sharing it with them.

He suggested that one way of avoiding this situation is to put your money in places and in chunks where it really hurts to give them away, breaking a fixed deposit of Rs. 5 lakhs is a lot more painful than writing a check for Rs. 50,000 from your savings account. Sounds like great words of wisdom to me.

3. No one knows any secrets: A friend’s dad only invests in post office schemes and bank fixed deposits and he is never tempted to make great returns on a swanky new insurance product or the stock market or anything else that’s hot at the moment. His philosophy is simple, there is only so much money you can make with money, so don’t get sucked into dreams of doubling or tripling your money in a year or two. No one knows any secrets.

When you think of all the smart people that invested with Madoff and never chose to question his returns, it’s obvious that there was an implicit assumption that somehow Madoff knew a secret that the rest of the market didn’t. That kind of thinking is at least part of what led them to believe in the Ponzi scheme. I think it’s wise to assume that no one knows any secrets, specially when dealing with all your retirement savings. Playing it safe is better than assuming that someone has access to a golden goose that he’s willing to share with you.

Finally, since I didn’t talk about any products, here is a link to an older post with a list of some safe investments that seem appropriate for this situation.

Reader Pattu  has developed a retirement calculator for his own use, and was interested in sharing it with other OneMint readers as well. I took a look at it, and liked what he’s done, so I’m sharing the calculator here.

Download Retirement Planner

He has also described his thought process, which I’m sharing below.

Retirement planning is a complicated financial goal. When you save for a new car, exotic holiday or even for the education of your children, all or most of the accumulated corpus would get spent when the time for the goal arrives. So it is easier to calculate the corpus required for such goals.

When it comes to retirement planning the corpus calculation is complicated because the corpus does not get spent in one shot. Typically it is allowed to grow at some post-retirement interest rate (usually underestimated for safety) and monthly withdrawals are made from it. For complete financial independence during retirement, these withdrawals or pension must increase according to the post-retirement inflation rate.

So the retirement corpus calculation has to take into account not only the years to retirement, present inflation rate but also post-retirement inflation, number of years in retirement and post-retirement interest rate on the corpus.

Given these input parameters, retirement planning consists of two major steps.

1. Calculation of the corpus required:

(a) Compute projected future monthly expenses at the start of retirement. This amount can be taken as the initial monthly pension which will be withdrawn from the corpus.

(b) This monthly pension amount is assumed to increase every year according to the rate of inflation, while the corpus is assumed to grow at some constant interest rate. Using these inputs the corpus is calculated using Excel’s present value calculator (PV).  The inputs to the PV function, the formulae used are a bit technical and can be found here.

(The site also has a nice annuity calculator which will be of interest to people close to retirement).

Since the withdrawals are indexed to inflation, the corpus will decrease each year and become zero at the end of the retirement period given as input. A typical rise and fall of the corpus is shown here.

2. Calculation of the monthly investment amount required:

Once the corpus needed is known this calculation is similar to any other financial goal. It uses the number of years to retirement, estimates of present inflation and annual interest rate, annual increase in investment if any, and amount accumulated so far if any.

The excel based calculator does the above tasks and present an annual cash flow chart of the monthly investment made, monthly expenses, the growth of the retirement corpus prior to retirement and its decrease post retirement. Annual salary is also shown for reference.

Please note:

1. The calculator has been repeatedly tested and checked. However no guarantee is made that it is free of errors. Like every other tool it serves only as an estimate for the monthly investment required and depends on the input parameters. It is meant to be used for education purposes only.

2. For simplicity the pre- and post-retirement inflation rates are taken to be the same. Use a reasonably high value to be safe. A financial expert suggested using 8-9%

3. The pre-retirement interest rate is taken as constant. Since equity allocation would decrease as retirement approaches this would change. The calculator can easily be modified to take into account variable interest rate. Contact me if you need to look at such a calculation.

Download Retirement Planner

Bugs, comments and suggestions are welcome.

Pattu

[email protected]

Update: Fixed a divide by zero error bug.

A question that pops up quite frequently in comments is how much pension will I get from NPS, and I think it’s not clear to a lot of people that the NPS itself won’t give them a pension.

There are two things that you need to keep in mind:

• NPS doesn’t pay a pension directly.
• There is no fixed rate at which your money will grow.

NPS doesn’t pay a pension directly

The way NPS works is that you invest regularly in the scheme and the scheme invests that money on your behalf.

At the age of 60 you will get the money and it will be up to you to invest it and generate an income for yourself. In this regard you can think of it more like a provident fund than a pension.

Under NPS there is no fixed rate at which your money will grow

When you open the NPS account – you will be asked to select a fund manager and your money will be invested by this fund manager. You will also be asked whether you want to choose an Ultra Safe, Safe or Medium approach, and based on your selection the fund managers will spread your money between debt and equity instruments. The rate of growth will depend on the performance of the fund managers and the choices you make, so to that extent it’s not like a bank fixed deposit where they tell you that you will get 8 or 9% interest regardless of anything else.

How to calculate pension amount from NPS?

Keeping these things in mind it should become clear that you can only get an idea of how much pension you can generate and not an accurate answer.

So, how do you get that idea?

Suppose you have the following question:

I am 28 years old – how much pension will I get if I invest Rs. 2,000 every month?

CAMS has got this great corpus calculator which allows you to input the parameters and tells you how much your final corpus will be.

In this case I’ll put in the following numbers:

• Contribution Amount: 2000
• Periodicity: Monthly
• Rate of Interest: 9.5% (Assumed)
• Number of Years: 32 (60 – 28)

The calculator shows me a value of Rs. 50,05,164.

Now, this is the amount that you will get at the end of 60 years, and you will have to invest it in order to get a pension. You could create a bank fixed deposit with it or buy an annuity. NPS requires  you to buy an annuity from 40% of your money in the Tier 1 account compulsorily, but there is no such restriction on the Tier 2 account, so you can keep that in mind while opening the NPS account.

Conclusion

The first thing you should keep in mind is that NPS won’t pay you a pension directly, the second point is that the rate of return is not fixed either, and the third thing is when you get the NPS money you will be free (to an extent) to invest it, and generate an income for you as you see fit.

I got this email early last week (slightly edited):

I would like to know something about annuity. I am 49 yrs old, suppose I am investing Rs. 100,000 yearly till i attain 60 years and NPS is showing growth in total of 1600000.
40% will be 6,40,000.
Now explain to me how annuity of 6,40,000 will help me for rest of my life?/for how long?/how much?
I am still confuse about retirement plan.
If I calculate inflation and I retired at the age of 60 yrs and live up to 75 years. What so ever I save for my retirement plan appears to be peanuts.
Thinking daily on “life after retirement” a am spoiling my today.
If you have some better idea about retirement please guide me.

To me the heart of the problem is the sum that this person expects to accumulate when he is 60, and not the annuity itself because if you can accumulate a decent sum at the time of retirement, then you can do an annuity, fixed deposit, plan your withdrawal rate, whatever, but if you don’t have a lot at that age, then what is the point of thinking about anything else?
In that sense, I think this is slightly different from the earlier discussions we’ve had on this topic here.

In an economy like India where the inflation rate is quite high it is only reasonable to be worried about how inflation will eat into your retirement nest, however the other side of the coin is rarely talked about, if ever at all.

Your salary should also increase to match inflation and you should at least be able to increase your savings by the inflation rate or even if it is a smaller number, there should be some increase right? But this is too often not accounted for even when it’s quite clear that it can be quite a big number.

Let me give you an example: If you invest Rs. 1,00,000 per year for 12 years, and get 8% per annum returns on your investment, at the end of the 12 years you will have a corpus of Rs. 18,97,712, but if you increase your investment by 8% every year by age 60 you will accumulate about Rs. 25 lakhs, and one more year will make this sum go to Rs. 30 lakhs.

I’ve done these calculations here so you can see how I reached that number.

The key is not to be despondent, and start doing the right thing – better late than never right?

In the last poll I had asked you how much money do you need per month to retire in India today, and 48% of you (190 votes) said between Rs. 20,000 and Rs. 50,000. To my surprise, the next biggest segment was the more than Rs.1,00,000 segment with 20%, and you can see the rest of the results below.

(click for bigger image)

In this post, I am going to be what I think is called a party pooper, and say that a lot of you believe that you’ll need lesser money than you spend today during your retirement, but you are probably wrong.

For starters, if you’re salaried and not in your forties yet, then you are probably far away from what is going to be your peak income. Your income might look like a reasonable sum to you today, but wait till you start making a lot more, and see Parkinson’s second law kick into effect:

expenditures rise to meet income

Now it’s true that you will have more responsibilities at that time than today, and a lot of those will not be present during your retirement, but it’s just as likely that there are some unforeseen liabilities as well; how is that percentage going to work out? How do you calculate something like that anyway?

Next up, when you think that you will need lesser money during retirement than today, that automatically implies that you need to save less today, and that in turn implies more money to splurge; think about it – aren’t you much more likely to lull yourself into making some assumptions that make spending easier today? After all, delayed gratification is hard, really hard.

That said, I believe that a lot of you are way ahead of the game just by thinking about retirement, and planning for retirement. Starting retirement planning early means that you develop a long term approach to retirement, think about various alternatives where you can invest your money, not fall in credit card debt, and give yourself the benefit of compounding which makes a huge difference.

As long as you are not looking at huge debt, saving a decent amount by being frugal (but not stingy), and making good investment habits, whatever your number is – you will be alright.

So don’t fret too much about the number, which is too far out in the future, and so variable that it’s hard to predict, and focus instead on developing good financial habits. And thank you all for your wonderful comments!