National Pension System (NPS): In India, young people often think that saving for retirement is an old-fashioned thing to do. This is something that a lot of people think about much later in life, but starting early can make a big difference. This way of thinking is mostly caused by not being aware of things. Most young workers don’t learn about planning for retirement until they’ve been working for a while. They don’t know that even a small monthly contribution of a few thousand rupees can build up into a big retirement fund that could give them a monthly pension of one lakh rupees when they leave.

Young people can gain from compound growth over a longer period of time if they start planning for retirement early. The National Pension System (NPS) steps in at this point. Traditional plans like the Employees’ Provident Fund (EPF) and the Public Provident Fund (PPF) have been popular for a long time. However, many young workers are now switching to NPS.

What is the National Pension System (NPS)?

NPS is a market-linked retirement plan that lets account holders invest in government, corporate, and equity assets. A higher level of equity exposure can help investors to get more long-term growth. The compound growth potential of the program appeals to young people beginning their retirement path early on.

Benefits of Starting Early with NPS

• Longer Compounding Period: Starting at age 25 allows for a longer compounding period, significantly increasing the retirement corpus.
• Higher Equity Exposure: Up to 75% equity exposure is available to young participants, which will yield higher profits over time.

According to Zee Buisness, Ranbheer Singh Dhariwal, CEO of Max Life Pension Fund Management Limited, stresses the importance of starting NPS contributions at age 25. The age and risk tolerance of the investor should guide the balance between debt and equity in their NPS portfolio. Younger investors should have more stock exposure, he counsels, as they have more time to bounce back from market swings and gain from possible large returns.

However, what would happen if, instead of choosing 75% exposure, you chose 25% or 50% exposure when you first started making NPS payments at age 25?

The CEO of Max Life Pension Fund Management Limited, Ranbheer Singh Dhariwal, advises that you plan your NPS journey and begin contributing at age 25.

According to Dhariwal, an investor’s age and risk tolerance will typically determine the best combination for their NPS portfolio, which is made up of both debt and equity components.

According to Dhariwal, “the equity exposure should be higher the lower the age.”

For someone starting at age 25, 30, or even 40, he suggests the following asset allocation:

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

A monthly contribution towards a pension of Rs. 1 lakh

For someone just starting, Dhariwal states: “An individual who starts investing at the age of 25 needs to contribute Rs. 5,865 per month with an aggressive life cycle fund for 35 years to get a monthly pension of Rs. 1 lakh.” A greater beginning age and comparatively lesser equity exposure would result in a larger necessary monthly contribution.

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

Max Life Pension Fund Management Limited provided the chart.

The interesting thing about this situation is that, even if you buy an annuity to receive a Rs 1 lakh monthly pension, you can still take out at least Rs 2,57,16,660 as your retirement corpus.

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

• Aggressive Lifecycle Fund: A maximum of 75% of total assets allocated to equity investments, beginning at 75% until age 35 and progressively declining as one age.
• Balanced Lifecycle Fund: A maximum of 50% of total assets allocated to equity investments, beginning at 50% until age 35 and progressively declining as one age.
• Conservative Life Cycle Fund: A cap of 25% of total assets allocated to equity investments, with the percentage increasing to 25% until age 35 and progressively decreasing as one age.

To take advantage of the long-term growth potential and counteract the volatility, the asset allocation shown above substantially favours equities. This could contribute to building a decent retirement fund. However, according to Dhariwal, the subscriber’s choice of pension plan when leaving NPS as well as the annuity rates in effect at the time of retirement determine the monthly payout.