A person should start planning for retirement as soon as he starts a job. The sooner you start planning for it, the more likely you are to arrange for a pension on retirement. Now the question arises here that how can one start it. So one answer to this is the National Pension System.
National Pension System (NPS) is considered an effective option to achieve financial independence for retirement. This scheme is especially ideal for long-term investments and offers great returns to investors due to the power of compound interest. If a person starts investing at the age of 20, he can avail a monthly pension of Rs 1 lakh when he retires at the age of 60.
How does NPS work?
The biggest advantage of investing in NPS is that it provides a lump sum amount along with pension after retirement. Under this, the investor gets the option of withdrawing 60% of the amount as a lump sum, while 40% of the amount goes into the annuity scheme, which provides regular pension.
Suppose, a person starts investing Rs 7,850 per month in NPS at the age of 20 and stays invested for 40 years at an assumed annual return rate of 10%. His total investment amount in this period will be Rs 37.68 lakh, while the interest earned will be Rs 4.63 crore. Thus, the total fund will be more than Rs 5 crore.
How to get pension of Rs 1 lakh
- The fund that you will have saved at the age of 60 will be divided into two parts.
- 60% lump sum withdrawal: Rs 3.00 crore
- 40% investment in annuity plan: Rs 2.00 crore
- Based on an estimated annual return rate of 6% on annuity, this annuity plan will give you a pension of Rs 1,00,116 every month.
Benefits of NPS investment
- You get the full benefit of compound interest if you start investing at the age of 20.
- The monthly investment amount can be increased over time.
- Tax exemption is available on NPS investment under Section 80C and 80CCD (1B) of the Income Tax Act.
- This scheme assures regular income after retirement.
