Is investment of Rs. 50,000 in NPS enough to fund your retirement?
NPS or National Pension System is something people only think of as a tax benefit and usually invest only Rs. 50,000 which is the amount of additional tax benefit that you can avail under section 80CCD. This benefit is over and above the tax benefit of Rs. 1.5 lakhs that you get under section 80C. So, the question is whether this investment of Rs. 50,000 is enough to fulfill your retirement needs?
Assuming you are an aggressive investor and invest 75 per cent in equity, 15 per cent in corporate debt and the remaining 10 per cent in government securities. That said, every year you would be investing Rs. 37,500 in equities, Rs. 7,500 in corporate debt and Rs. 5,000 in government securities. So, if we look at the average 6-months, 1-year, 3-year and 5-year returns then they stand as 2.25 per cent, -2.82 per cent, 8.17 per cent and 8.03 per cent respectively for equity, 7.98 per cent, 13.03 per cent, 8.56 per cent and 10.06 per cent, respectively for corporate debt and 10.95 per cent, 19.55 per cent, 9.32 per cent and 11.32 per cent, respectively for government securities.
Let’s say that your age is 30 years and you have a monthly expense of Rs. 30,000. This expense rises at the rate of 7 per cent every year even post-retirement and expected rate of return post-retirement being 9 per cent. You are planning to retire at the age of 60 and life expectancy being at the age of 85. So you would require Rs. 5.48 crore as retirement corpus. So, as per the above setup if you invest in NPS assuming rate of return for equity being 12 per cent, corporate debt being 8 per cent and government securities being 8 per cent. With this till retirement, you would be able to achieve Rs. 1.21 crore whereas your requirement is Rs. 5.48 crore. So to achieve this you need to invest either more in NPS or you need to invest in other investment avenues. Here we have ignored your EPF (Employee Provident Fund), gratuity and superannuation. We have even ignored the taxation part.