Retirement Planning: Financial freedom is necessary for any individual. The sooner they achieve it, the better their lives can be. Retirement schemes such as National Pension System (NPS) are also aimed at helping senior citizens get financial freedom. Nothing sounds better than having a corpus at retirement age and a monthly pension after that. One can literally be financially free if they have monetary arrangements for their daily expenditures. If one manages to do that for their old age, they don't have to depend on others and can live life on their own terms. 

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But the thumb rule for achieving financial freedom early is to start investing early. In schemes such as NPS, where one gets compound growth, the early starter gets the advantage of investing a much smaller monthly amount than a late starter and the same retirement corpus and monthly pension.

So, if somebody starts contributing to NPS at 25 instead of 40, they may have to contribute just one fourth to get the same corpus and pension as the latter. It happens because of the power of compounding.

But many times, people don't start retirement planning for two reasons- either they don't know much about investment options or they don't know how much contribution a month will be sufficient for them to get a retirement corpus large enough to provide them with a lifelong pension.

For many, there is not much clarity on retirement planning, even when they are nearing 40 years of age.

Ranbheer Singh Dhariwal, Chief Executive Officer, Max Life Pension Fund Management Limited, provides some insights as to how much one needs to contribute a month to get over Rs 2.50 crore of retirement corpus and a Rs 1 lakh monthly NPS pension.

Through his calculations, he also tells us what the monthly NPS contribution should be if one starts investing at the age of 25 years, 30 years, or 40 years. 

In the chart given below, the equity exposure in all three cases is 75 per cent and the annualised return on contributions is 12.48 per cent. The return on annuity to get a monthly pension is seven per cent per annum.

Life cycle - Aggressive Age @ 25 Age @ 30 Age @ 40
Monthly contribution required                5,865              20,970                 40,650
Annual contribution              70,380           2,51,640              4,87,800
Total contribution         24,63,300         62,91,000            97,56,000
Returns 12.48% 12.48% 12.48%
Balance Age         35                     25                        20
Months of contribution            420                   300                      240
Total Corpus at the age of 60 years ₹ 4,28,72,678 ₹ 4,28,78,376 ₹ 4,28,81,868
Lumpsum corpus at hand @ 60% ₹ 2,57,23,607 ₹ 2,57,27,026 ₹ 2,57,29,121
 "@ 40%  as annuity corpus ₹ 1,71,49,071 ₹ 1,71,51,350 ₹ 1,71,52,747
Annuity rates (assumed) @7% p.a. ₹ 12,00,435 ₹ 12,00,595 ₹ 12,00,692
Monthly pension ₹ 1,00,036 ₹ 1,00,050 ₹ 1,00,058

Chart Courtesy: Max Life Insurance 

Thus, we see that starting to invest early increases one's investment horizon to 35 years (or 420 months), but they need to contribute just Rs 5,865 a month, Rs 70,380 in a year, and Rs 24,63,300 overall.

On the other hand, if one delays NPS contributions by 10 years, the monthly NPS contributions swell by over 3.50 times.

The investment horizon decreases to 25 years, but the monthly contribution soars to Rs 20,970, yearly to Rs 2,51,640, and overall to Rs 62,91,000.

The third scenario gives quite a bit of clarity as to why one should start their retirement planning early.

The investment span decreases to just 20 years (250 months), but the monthly contribution rises by nearly seven times to Rs 40,650, Rs 4,87,800 in a year, and Rs 97,56,000 in total.

It means that if you start your NPS contribution at 40 years of age instead of 25, you may have to pay Rs 72,92,700 less in 170 months to get the same corpus and pension.