NPS Pension: In India, retirement planning among youngsters is not popular. Indeed, many of them consider it a primitive exercise. The primary reason behind it is their lack of knowledge about it. Most of them get this knowledge after completing years of their job. While they hardly know the importance of retirement planning when they begin their jobs, they don't have an idea that their monthly contribution of just a few thousand rupees can help them build a retirement corpus running into several crores and easily get a monthly pension of Rs 1 lakh by the retirement age. 

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While Employees' Provident Fund (EPF) and Public Provident Fund (PPF) two old retirement-focussed schemes that have been running for decades, a lot of youngsters are starting their retirement journey with National Pension System (NPS).

NPS is a market-linked retirement scheme where account holders can pick equity, corporate bonds, and government securities for their retirement portfolio.

The scheme offers compound growth, so picking a high proportion of equity exposure is likely to help you achieve a larger corpus in the long run.

Starting the retirement journey early helps one get compounding for more years than someone who starts late, and they can also choose equity exposure of up to 75 per cent.

But what if, starting with NPS contributions at 25 years of age, you pick 25 per cent or 50 per cent exposure instead of 75 per cent?

Ranbheer Singh Dhariwal, Chief Executive Officer, Max Life Pension Fund Management Limited, suggests you plan your NPS journey and start contributing at 25 years of age.
  
Dhariwal says that the ideal mix for the NPS portfolio, which consists of equity and debt components, generally varies based on the age of the investor and their risk appetite. 

"Lower the age, higher should be the equity exposure," says Dhariwal.

He recommends asset allocation for someone starting at 25, 30, or even 40 years of age as follows:

• Equity: 75 per cent
• Corporate Bonds: 10 per cent
• Government Securities: 15 per cent

Monthly contribution to get Rs 1 lakh pension  

For someone who is starting Dhariwal says: "In order to get a monthly pension of Rs 1 lakh, an individual who starts investing at the age of 25 years needs to contribute Rs. 5,865 per month for 35 years with an aggressive life cycle fund. The required monthly contribution would increase with a higher starting age and relatively lower equity exposure. 

Life cycle fund    ---> Aggressive Balanced Conservative
Monthly contribution required Rs. 5,865 Rs. 8,930 Rs. 13,250
Annual contribution Rs. 70,380 Rs. 1,07,160 Rs. 1,59,000
NPS Returns (based on past returns) 12.50% 10.90% 9.40%
Corpus accumulated at the age of 60 years 4,28,72,678 4,28,65,925 4,28,61,100
Purchase annuity @ 40% of the corpus  1,71,49,071 1,71,46,370 1,71,44,440
Monthly pension (annuity rate @7%) 1,00,036 1,00,020 1,00,009

Chart Courtesy: Max Life Pension Fund Management Limited

Here, what is striking thing is that even after purchasing annuity to get a monthly pension of Rs 1 lakh, you can withdraw at least Rs 2,57,16,660 as the retirement corpus.

What do aggressive, balanced, and conservative life cycle funds mean?

• Aggressive Lifecycle Fund: A cap of 75 per cent of the total assets for equity investment, starting with 75 per cent till 35 years of age and gradually reducing with age

• Balanced Lifecycle Fund: A cap of 50 per cent of the total assets for equity investment, starting with 50 per cent till 35 years of age and gradually reducing with age

• Conservative Life Cycle Fund: A cap of 25 per cent of the total assets for equity investment starting with 25 per cent till 35 years of age and gradually reducing with age 

"The above asset allocation leans heavily towards equities to benefit from long-term growth potential and to offset the volatility over the long run. This may help in creating a comfortable retirement corpus. Having said this, the monthly pension depends on the annuity rates prevailing at the time of retirement and the pension plan the subscriber chooses while exiting from NPS," says Dhariwal.