How to invest your NPS corpus to get most returns in retirement?
60% of the NPS corpus needs to be invested at maturity with other retirement funds as a lump sum. This post shows how.
60% of the NPS corpus needs to be invested at maturity with other retirement funds as a lump sum. This post shows how.
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National Pension Scheme (NPS) is touted as a one-stop solution for retirement planning. It was launched in 2004 when the Government of India realized that it will become impossible to continue with defined benefit (DB) pension plans. Instead, a defined contribution (DC) plan where the participant invests and takes on market risk was put in place. In a DC plan, you bear the risk of the investments not doing well since they are linked to the stock and bond markets, unlike the DB plan where the government takes the risk.
You invest in the NPS from your current income, and once you reach 60, you have to use:
You can defer withdrawing from NPS if you want to: either the annuity or lump sum or both can be delayed.
NPS is effectively a wrapper around mutual funds with available equity, debt (government and corporate), and alternative investment options.
This post targets individuals nearing retirement age or who have recently received their retirement corpus from NPS and other sources like superannuation and provident fund. Since this is a rather large amount, it needs to be invested properly to fund the necessary lifestyle in retirement.
To follow the rest of the article, you need to find your target retirement expenses. We have a handy calculator here: How can you figure out your expenses in retirement/FIRE?
Alternatively, you can make it a percentage of your current expenses based on a 3-point scale based on :
You will have to set these percentages first by your desire and then based on running the numbers for your retirement plan. We will assume 6 lakhs/year (50,000/month) and 7% inflation for 30 years in retirement. We will use the simple web based retirement calculator to plan for retirement. The cases below will have screenshots from the calculator.
We will exclude all real estate investments in the corpus unless it is sold and included as liquid assets. You can use the rent from such investments to lower the expense in retirement.
At this point, you are not yet eligible for NPS withdrawal. Instead, you should estimate your retirement total benefits from multiple sources like provident funds and other investments in mutual funds, stocks, bank deposits and other sources.
Let us assume that the age is 56, and the total corpus available is ₹1 crore split like this:
The calculator shows that
You need to adjust the NPS and outside investments to match the asset allocation shown. The target 47 lakhs in equity should be invested outside NPS as much as possible since NPS has strict limits on equity allocation. This post will tell you how to choose funds for investing.
In this case, we need to be mindful that there are no “low-risk” investments inside NPS and hence managing the portfolio with the right expectations is essential. This topic is discussed in more detail here: The unknown risk in NPS that few people talk about.
At this point, you are still not yet eligible for NPS withdrawal. But you have already received your retirement benefits from multiple sources like the provident fund. Let us assume that the age is 58, and the total corpus available is ₹1 crore split like this:
The calculator shows that
Given that 35 lakhs is inside NPS and 65 lakhs is outside, the equity allocation of the portfolio can be only 25 lakhs and not 43 as the asset allocation shows. We will bump up the equity allocation when NPS corpus is withdrawable.
Let us assume that the age is 60, and the total corpus available is ₹1 crore which is split like this:
To construct a retirement portfolio using these funds, follow the bucket method with a pension. You need to create three buckets:
If the number of years supported in retirement out of the current assets is very low, you have several options:
Read more on this topic here:
We have already covered how to invest a large sum of money into equity as a lump sum or split over a few months. Timing the market is not an exact science and is a delicate balance between:
This is an excellent time to revisit the probabilities of a market crash, as discussed in this post, like this:
Suppose a market crash of a certain magnitude has recently occurred. In that case, the chances of recovery are higher and can be used to plan the investment.
We have performed a detailed analysis of the result of the forced annuity purchase. We already understand that annuity rates are going down as the economy develops and low annuity rates increase the risk of running out of money in retirement.
This article discusses how to plan early retirement in the face of lifestyle inflation and lack of health insurance for an investor in their 40s.
Published: 8 December 2024
7 MIN READ
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This post titled How to invest your NPS corpus to get most returns in retirement? first appeared on 06 Mar 2022 at https://arthgyaan.com