July 15, 2024

INDIA TAAZA KHABAR

SABSE BADA NEWS

50% NPS pension for central govt staff? Is it enough for retirement?

8 min read

Several news portals have reported that the government is considering a proposal to offer 40% to 50% of the last drawn salary as a guaranteed pension for central government NPS subscribers.It may never come to pass (because if the subscribers’ NPS corpus is not big enough to meet this guaranteed pension, the shortfall would be borne by the government). Still, it is essential to appreciate if a pension equal to 50% of the last drawn pay is enough for retirement. The short answer is a big no!This is a set of retirement planning slides I used at investor workshops. The aim is to convey the importance of retirement planning in a few slides to young earners.1. Imagine how your monthly income will evolve in the futureevolution of monthly incomeThe abrupt stoppage in income represents retirement.2. Now imagine how your monthly expenses will evolve in the futureevolution of monthly income with salaryExpenses do not stop when income stops. So those who do not have the means to account for expenses when income stops better hope they are dead on or before retirement!The expenses in the above graph seem to head for the roof. Let us rescale it over our expected lifetime.Rescaled evolution of monthly income with salaryIn about 15 years after retirement, the monthly expenses, thanks to inflation, are higher than the last drawn pay!If I had an (imaginary) monthly pension that equals my last drawn pay, I would only be financially independent for about 15 years after retirement. So we need to do a lot better!If the pension is equal to the last drawn payWhen the pension is only 50% of the last drawn pay.pension = 50% of last drawn payTherefore, a pension is necessary but only one component of a retirement portfolio. See: Creating the “ideal” retirement plan with income flooring!So before you jump in and opt for that higher EPS pension, ask yourself if you have enough money to fund the higher expenses due to inflation and lifestyle changes.Instead, think of  Inflation-protected income (blue dot within the red circles below)Inflation-protected income after retirementTo generate this inflation-protected income, you need a corpus between ~ 25-35 times  (depending on inputs) your annual expenses at the time of retirement (the earliest green dot). As you withdraw more and more from the corpus, it decreases and drops to zero, hopefully when you die and only when you die. Ensuring this is the third stage in retirement planning.The second stage is to ensure our investments grow and hit the first green dot when we retire.Building the necessary retirement corpusWe need to do two things to grow the corpus. 1. Choose a productive but diversified portfolio; 2. InvestOne cannot choose to invest a constant sum because the monthly investment to be made immediately will be much larger than the monthly expenses.We can increase our investment yearly until retirement to ease our burden. This would imply we must strive to invest as much as we spend.This is easier said than done. Let us have a look at the second graph again.evolution of monthly income with salaryIn this picture, the gap between the monthly salary and monthly expenses increases as we approach retirement.  If this is how our lives pan out, then we can invest as much as we spend with a little effort and discipline.lifestyle creep illustrationUnfortunately, our expenses grow in steps, as shown in green above. Call it lifestyle creep if you like. If we embrace every new technology that arrives, if we cannot distinguish between our needs and wants, if we succumb to peer pressure and buy what others buy, we will never be able to invest enough.Meaning we are sowing the seeds for our future financial doom today.Lifestyle creep, the desire to spend for today and enjoy when young, resides in all of us.  What is needed is a definite boundary: We can spend how we wish as long as we can manage to invest as much as we can.Safeguarding that boundary is the first and foremost step of retirement planning. If you want to start your retirement planning, you can do so with an automated risk reduction strategy before and after retirement using our robo-advisor tool. For an illustration, see: I am 30 and wish to retire by 50; how should I plan my investments?In summary, even if the guaranteed NPS pension of 40% to 50% of the last drawn salary becomes a reality, it will not be enough to handle inflation after retirement. Make sure you invest enough to fend for retirement independently. Do share this article with your friends using the buttons below. 🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users! Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this! New Tool! => Track your mutual funds and stock investments with this Google Sheet! We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.Follow Freefincal on Google NewsSubscribe to the freefincal Youtube Channel.Follow freefincal on WhatsApp Podcast: Let’s Get RICH With PATTU! Every single Indian CAN grow their wealth! Listen to the Let’s Get Rich with Pattu Podcast You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.Let’s Get RICH With PATTU podcast on YouTube. 🔥Now Watch Let’s Get Rich With Pattu தமிழில் (in Tamil)! 🔥Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincalHave a question? Subscribe to our newsletter using the form below.Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question. Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!About The Author Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice. Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! 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We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!Feedback from a young reader after reading Chinchu gets a Superpower!Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun. Buy the book: Chinchu gets a superpower for your child! How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only! Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool! We publish monthly mutual fund screeners and momentum, low-volatility stock screeners. About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters at freefincal dot com (sponsored posts or paid collaborations will not be entertained) Connect with us on social media Our publicationsYou Can Be Rich Too with Goal-Based Investing Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! 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