Will NPS Vatsalya Give Your Child Eleven Crores When They Retire?
This article discusses the corpus projections shared officially when launching the NPS Vatsalya scheme and how parents should be aware of the danger of ignoring inflation.
Will NPS Vatsalya Give Your Child Eleven Crores When They Retire?
Posted on 20 Sep 2024
Author: Sayan Sircar
6 mins read
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This article discusses the corpus projections shared officially when launching the NPS Vatsalya scheme and how parents should be aware of the danger of ignoring inflation.
This article is a part of our detailed article series on avoidable investment plans for your children. Ensure you have read the other parts here:
-
NPS Vatsalya details revealed: is it good for your children's future or avoidable?
This article discusses the NPS Vatsalya scheme that does not really offer any greate benefits over simply investing in mutual funds.
-
NPS Vatsalya: A Gimmicky Product That Should Be Avoided If You Are Serious About Investing For Your Children
This article discusses the NPS Vatsalya scheme that does not make any sense as a product for anyone even if you plan to invest for your children’s retirement.
-
Why LIC Amritbaal policy is a complete wastage of money: how to invest for your child in the right way
We review the new LIC Amritbaal insurance cum investment plan so that parents are aware that the plan is not good for most people. We will also show what to do instead for your kid’s goals.
📚 Topics covered:
- Will NPS Vatsalya Give Your Child 11 Crores When They Retire?
- Where do the ₹11 Crores come from?
- What is the impact of inflation on ₹11 crores after 60 years?
- What will be the pension from ₹11 crores of corpus after 60 years?
- What if we invest more or get a higher return?
Will NPS Vatsalya Give Your Child 11 Crores When They Retire?
We saw this tweet when analysing the NPS Vatsalya launch on 18 September 2024. The source is the official Twitter account of the Press Information Bureau (Chandigarh office):
© X / https://x.com/PIBChandigarh/status/1836329030695391394
What does the Tweet (X?) say?
- If you invest a small amount like ₹10,000/year
- and continue investing the same amount for 60 years in NPS Vatsalya
- and get the same 12.86% that has been seen in NPS since inception
Then, your child will get ₹11.05 crores when they reach the age of 60.
Where do the ₹11 Crores come from?
There is nothing wrong with the projection mathematically. After all,
Corpus = FV(return,years,annual_contribution,0,0)
Corpus = FV(0.1286,60,-10000,0,0) = ₹11.03 crores
Using Excel / Google Sheets, you can type in this formula “=FV(0.1286,60,-10000,0,0)” and get the same result.
We will also make the, albeit ludicrous, assumption that the underlying NPS Vatsalya portfolio with equity and debt in a pre-defined proportion behaves like an FD and gives a fixed 12.86% a year.
The bigger problem, for those who have not come across the nuance, is that the ₹11 crores is not after inflation. Let us not ignore that this corpus was created after 60 years.
What is the impact of inflation on ₹11 crores after 60 years?
We use the rule of 72 to estimate the effect of inflation quickly. 7% inflation of goods and services shows that the cost will double in approximately 10 years or the purchasing power of money will be cut by half. So if you have 8 crores today, somehow, then the
- value of 8cr will be 4cr in 10 years
- value of 8cr will be 2cr in 20 years
- value of 8cr will be 1cr in 30 years
- value of 8cr will be 50 lakhs in 40 years
- value of 8cr will be 25 lakhs in 50 years
- value of 8cr will be 12.5 lakhs in 60 years
Applying the same logic to the ₹11 crore corpus, we see that after 60 years, the accumulated ₹11 crores will have the same worth as ₹34 lakhs today.
A quick mental maths shortcut to calculate this is:
- 7.2% inflation = halving in 10 years
- 60 years = 6 halvings
- 2 ^ 6 = 64
- Value of corpus = 1103 / 64 = 17
What will be the pension from ₹11 crores of corpus after 60 years?
This is where the absurdity of ignoring inflation in making a 60-year projection hits.
Let’s assume that the entire NPS corpus at retirement is invested into a pension plan at the age of 60.
Let’s also assume, that 60 years later, Indian annuities are still offering a 7% return.
What is the pension per year?
₹11 crores at 7% gives ₹77 lakhs/year or ₹6.43 lakhs/month pension
After 60 years of inflation, these numbers were reduced by 64 times
₹17 lakhs at 7% gives ₹1.2 lakhs/year or ₹10,000/month pension
Let’s not forget that this ₹10,000 stays fixed for life and loses 50% value every decade. You need to understand what exactly your child will do with ₹10,000/month where on paper, they are sitting on ₹11 crores of corpus.
What if we invest more or get a higher return?
That is not the point of this article. We can always plug in numbers in Excel and make assumptions to get any number after 60 years.
However, the point of this article is not to discuss the alternatives to NPS but to complete the picture when rosy scenarios like the PIB tweet are shown.
We anyway strongly believe that NPS Vatsalya is a gimmicky product that is best avoided. There are much better options to create a huge, inflation-adjusted corpus for your children: NPS Vatsalya details revealed: is it good for your children’s future or avoidable?.
Related Articles
- NPS Vatsalya details revealed: is it good for your children's future or avoidable?
- NPS Vatsalya: A Gimmicky Product That Should Be Avoided If You Are Serious About Investing For Your Children
- Can NPS Vatsalya be used to create wealth across generations?
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This post titled Will NPS Vatsalya Give Your Child Eleven Crores When They Retire? first appeared on 20 Sep 2024 at https://arthgyaan.com
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