If you’ve just turned 40 and are looking to build a retirement corpus that can provide you with a substantial monthly pension, the National Pension System (NPS) might be the answer. NPS has gained popularity as a versatile tool for retirement planning, offering various investment options, including equities for potentially higher returns.
Here’s a step-by-step guide on how to use NPS to secure a monthly pension of Rs 2 lakh after you turn 60:
Step 1: Understand the NPS Withdrawal Rule
- Currently, NPS subscribers cannot withdraw the entire corpus on maturity. A mandatory 40% of the total NPS corpus must be used to purchase an annuity plan from a life insurance company, which will provide a regular pension after retirement.
- The remaining 60% can be withdrawn as a lump sum, but you also have the option to use a portion of this lump sum to buy an annuity.
Step 2: Calculate the Required Corpus
- To receive a monthly pension of Rs 2 lakh, your total accumulated NPS corpus must reach Rs 4.02 crore upon maturity (at the age of 60), assuming an overall return of 6% after 20 years.
- You’ll need to allocate 40% of this corpus, which is Rs 1.61 crore, to purchase an annuity. This will leave you with Rs 2.41 crore as a lump sum at the age of 60.
Step 3: Calculate Monthly Pension from Annuity and Lump Sum
- Using the annuity and lump sum, you can generate your monthly pension as follows:
- If you invest the lump sum in a debt instrument, assuming a 6% yearly return, you will receive Rs 1,20,597 per month from the lump sum amount.
- If you use 40% of the total corpus to buy an annuity with a 6% annual return, you will receive a pension of Rs 80,398 every month from the annuity.
- Combining both sources, your total monthly pension will be Rs 2,00,995.
Step 4: Determine Your Monthly Contribution
- As you are starting at 40, you need to invest Rs 52,500 every month in NPS for the next 20 years to accumulate a corpus of Rs 4.02 crore, assuming an average equity exposure of 50% or more and a 10% annual return.
