I'm 40 and want to earn Rs 1 lakh at retirement. How much should I invest in NPS for 20 years?

Hi, I am a conservative investor and haven't saved for retirement yet. I am 40 years old and want to earn Rs 1 lakh when I retire at 60. I heard that the National Pension System (NPS) is a good option for retirement savings. Please guide me on how much I should invest in NPS for 20 years. 

Reply by Mayank Bhatnagar, Chief Operating Officer, FinEdge 

To receive an inflation-adjusted monthly income of Rs 1 lakh per month (in today's terms), a 40-year-old would need to invest roughly Rs 63,000 per month for the remaining 20 years leading up to their retirement in the NPS, assuming a reasonable rate of 10% CAGR (return) from their investment. Since there are mandated caps on the maximum allowed equity allocation in the NPS, it would not be easy to achieve a higher return than this.

Watch now: World Cup 2023 match today: Pat Cummins-led Team Australia vs Kusal Mendis-led Sri Lanka; AUS vs SL World Cup squads, toss timings, live streaming details

One of the key mistakes people make while planning their retirement is forgetting to take inflation into account. Remember, inflation will continue to reduce the purchasing power of money until you turn 60 and then for your entire retirement duration thereafter! That's four decades of inflation that your plan needs to account for.

Though NPS is a fairly good investment product, especially compared to other traditional products, the mandated purchase of an annuity with 40% of the corpus is a big dampener in the equation. What this means is that a large sum of your NPS corpus will be locked away, earning just about 5-6% per annum, pre-tax.

Also read: I want Rs 35 lakh for my daughter’s wedding after 10 years. How much should I invest via mutual fund SIPs?

Also read: These flexi-Cap equity mutual funds have given 30-34 times returns in the last 20 years

Also read: SIP vs lump sum: Which investment strategy wins the race for middle-class investors?

Also read: Insurers on edge: Will Israel-Hamas conflict result in higher insurance premium?

The remaining 60% would need to be invested prudently, with an appropriate balance of risk and reward, preferably with the support of an investment expert who can help you with a well-planned SWP (Systematic Withdrawal Plan) strategy.

By the time you retire, Rs 1 lakh worth of goods and services will probably need around Rs 2.65 lakh. Considering 5 per cent inflation. This amount would keep going up during your retirement as well. Considering this, one would need roughly Rs 4.85 crores corpus to draw upon when they retire since 40% of the fund would earn no more than 5 or 6% from the annuity. So overall, post-retirement returns of more than 8% per annum would be difficult to achieve from the accumulated NPS corpus.

We believe that a well-planned portfolio of mutual funds is a better long-term solution to the retirement problem than the NPS. We suggest you take help from an advisor and construct a detailed retirement portfolio to achieve your goal by the time you turn 60.

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)

Watch: Anand Mahindra shares India-Pakistan match video, Nithin Kamath's post on need for ‘Dalal Street’ in Bengaluru, Nita Ambani at 141st IOC session: India Inc on X (Twitter)