Individuals in the salaried and self-employed class invariably plan for retirement during their active working life. While preparing for investment, everyone at least must know how to get a 1 lakh pension per month that helps beat inflation as well. Several factors are responsible for building the retirement corpus like age, current income, and debt.Read more
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For Indians, 58 years is the general retirement age before which earning individuals need to build their investment portfolio. For this, two schemes readily come to mind – NPS and SIP. Let us take a closer look at them individually to gain a better perspective.
The best options for building a retirement corpus capable of offering a 1 Lac pension post-retirement are National Pension Scheme (NPS) and Mutual Fund’s Systematic Investment Plan (SIP).
As NPS and SIP serve varied needs, you must choose the one that best suits your future needs. Evaluate its benefits and your expected retirement amount for both schemes. Here is the detailed evaluation of both NPS and SIP schemes.
A central government social security initiative has been working as an all citizens model since 2008. The NPS structural design is such that you contribute during your active life and cannot withdraw any amount from the corpus till maturity.
Your investment is exposed up to 50%, risky equity instruments, gradually reducing with your age. For example, the exposure is 2% lower after 50 years of age. Moreover, reinvest up to 40% of the retirement corpus in an annuity for a post-retirement lifetime pension. The residual 60% corpus is yours for deployment in your chosen investment vehicle.
You contribute a fixed amount at predetermined intervals to mutual funds of your choice. The most common contribution period is monthly, directly recovered from your account through NACH. SIPs are flexible in every way.
Equity and equity-related instruments deliver the highest yields over a long-term horizon but are also the riskiest. However, a mix of equity and debt instruments carries a lower risk but delivers lower yields. You have the freedom to choose the exposure to meet your financial objectives.
Retirement planning determines how much monthly income supports a financially stable retired life. But it is easier said than done, considering the multiple factors involved, including inflation.
At first, evaluate your present financial obligations and what you can spare towards building a retirement corpus. However, the monthly contribution amount depends on NPS or SIP corpus and required ROI. In addition, your age and the investment horizon are the other determinants.
NPS is a voluntary defined contribution retirement scheme designed to provide a steady income stream after retirement. The Union Government launched the social security scheme empowering the subscribers to make optimum decisions impacting their future through sustained savings during their working life.
The Pension Fund Regulatory Authority (PFRDA) governs the scheme investing in market-linked hybrid funds. Thus, the higher returns through a mix of equity and debt instruments help the subscribers create a retirement corpus investing small monthly amounts. Accordingly, you must first learn the NPS structure to understand how it will deliver a 1 Lac pension in the future.
As you subscribe to the NPS, you get a PRAN (Permanent Retirement Account Number) to open the following accounts:
Tier-I: The account is mandatory where the contribution accumulate, whether yours or employers. You cannot withdraw the cumulative sum until you comply with NPS exit rules.
The balance in this account forms the basis of your retirement corpus. Reinvest 40% of the corpus in an annuity while you are free to withdraw the remaining 60% without paying any taxes.
Tier-II: The account is optional, and you can contribute according to your convenience. However, there is no bar on withdrawals from this account during the NPS tenure.
As an NPS subscriber, you have the option to choose investment vehicles. For example, you can allocate 60% in equity assets and 40% in debt. The balanced mix delivers approximately 10% returns.
Based upon this premise and a 30 years’ tenure, your monthly contribution is Rs 15,000 for getting a 1 Lac pension. The other assumptions are 60% of your retirement corpus is invested towards an annuity returning 6% per annum.
On the other hand, your financials work out differently if you have 20 years investment horizon to build the retirement corpus. You will need to invest Rs 32,000 per month for 20 years at 12% returns for a similar corpus.
Non-salaried individuals and the self-employed can make mutual fund investments the centerpiece of their retirement planning. Mutual funds are ideal for balancing your exposure to equity and debt funds.
The required retirement corpus for a 1 Lac monthly pension can be achieved for a 20 to 30 years’ investment horizon. The easiest way to achieve this is by investing through SIPs that don’t burn a hole in your pocket.
SEBI is the governing body framing the mutual fund rules and monitoring all the compliances for a safe investment vehicle.
The SIP model is convenient for investment in mutual funds attracting even small investors. However, there is no upper cap making it an ideal vehicle for retirement planning.
You can start a SIP with Rs 500 every month both online or offline.
You can switch between equity and debt asset classes using the convenient systematic transfer plan, reducing your risk exposure with growing age.
The ELSS fund helps you save on income tax as per extant tax laws.
If you start the SIP when you are 30, you have a 30 years investment horizon to accumulate a retirement corpus. An Rs 5666 SIP fetching you a corpus of Rs. 2 Cr as you turn 60 (with a 12% annual yield) is considered standard for mutual funds. Very few others deliver such a financial bonanza.
Investing 100% of the corpus, you can safely look for a monthly pension of Rs 1 Lac at a 6% annual return, the standard for annuities.
After evaluating both options, you must prioritize the return timeline and your financial goals to choose the right investment vehicle. However, the factors to consider additionally are your age, corpus, yield, and pension payouts.
You can still aim for an Rs 1 Lac pension post-retirement comfortably. It is always beneficial to use the retirement corpus fruitfully rather than keeping it idle in the savings account.
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