NPS retirement planning: Starting 10 years earlier could nearly triple your corpus, says DSP Pension Fund CEO

Starting retirement investments 10 years earlier could nearly triple the final corpus, even if the additional contribution over that period is just ₹12 lakh, according to Rahul Bhagat, CEO of DSP Pension Fund.

For someone investing ₹10,000 a month, an investment horizon of 25 years could build a corpus of around ₹1.2 crore, assuming an annual return of 10%. Extending the investment period to 35 years could increase the corpus to approximately ₹3.4 crore, Bhagat said.

The difference highlights the impact of compounding, which allows investment returns to generate further returns over time. These figures are illustrative and not guaranteed; actual returns will depend on market performance and other factors.

In an interaction with CNBC-TV18, Bhagat explained how starting early, increasing contributions as income grows, managing investment costs and choosing an appropriate asset allocation can influence the retirement corpus.

How does starting early affect your NPS corpus?

The advantage of starting early is not limited to the additional money invested. It also gives returns more time to compound, particularly in the later years when the accumulated corpus is larger.

Bhagat said investors should increase their contributions as their income rises. Even a 5% annual step-up in monthly contributions can make a significant difference over a long investment horizon.

Staying invested through market cycles and contributing regularly are equally important. Interruptions in contributions can affect the final corpus, while stopping investments during market corrections could mean missing a subsequent recovery.

How should NPS subscribers balance equity and debt?

The appropriate asset allocation depends partly on how much time an investor has before retirement.

Bhagat said investors in their twenties and thirties can generally consider a higher equity allocation because they have more time to withstand market volatility and recover from downturns. As retirement approaches, gradually increasing debt exposure can help reduce the risk of a market correction affecting the accumulated corpus.

The final five to 10 years before retirement require particular attention, as a sharp fall in markets during this period can leave investors with less time to recover before withdrawals begin.

Lifecycle funds can help manage this risk by gradually reducing equity exposure as subscribers age. However, investors should consider whether the fund’s allocation strategy matches their retirement plans, other investments and financial circumstances.

Bhagat also cautioned against making sudden portfolio changes in response to market headlines. For long-term investors, reacting to short-term volatility by moving entirely into debt could mean missing a market recovery.

Can lower NPS charges make a difference?

Investment costs can also influence the final retirement corpus because fund management charges are deducted over the investment period.

Bhagat illustrated this with a monthly investment of ₹10,000 over 30 years, assuming a gross annual return of 10%. According to his estimates, the investment could grow to around ₹2 crore with annual charges of approximately 0.1%. At an annual charge of 1%, the final corpus could be around ₹1.7 crore, a difference of approximately ₹33 lakh.

He said investors should compare long-term returns after costs rather than evaluating pension funds on charges alone.

How should investors plan for retirement income?

Building a retirement corpus is only one part of the planning process. Investors also need to estimate how much they will require to meet expenses after they stop working.

At an assumed annual inflation rate of 6%, a household spending ₹50,000 a month today would need more than ₹2 lakh a month after 25 years to maintain a comparable level of purchasing power.

Bhagat said retirement planning should therefore account for future expenses rather than relying on current spending levels.

For non-government NPS subscribers, the standard exit framework requires at least 20% of the corpus to be used to purchase an annuity. An annuity can provide income for life, but fixed payouts may lose purchasing power as inflation rises.

Bhagat said retirees could consider combining an annuity to cover essential expenses with market-linked withdrawals from the remaining corpus.

He also pointed to the Pension Fund Regulatory and Development Authority’s Retirement Income Scheme framework, which provides for periodic payouts while the remaining money stays invested.

Market-linked withdrawals, however, are not guaranteed and depend on investment performance.