There was a recent thread where everyone was debating whether NPS tier 1 is a good option vs putting the same amount in equity, so I did some calculations and wanted to take feedback from the community. The calculation is being done with several assumptions:
Equity returns: 12%
Debt Returns: 7%
Nps return(75 equity/25 debt): 10.75%
Years till retirement: 30( currently aged 25)
Tax rate : 30%
Inflation : 7%
Annuity rate: 8%(https://cra-nsdl.com/CRAOnline/aspQuote.html) This varies depending on your age, 7.5 to 8.3 is what I found for 55 year old available today with no return of capital)
Since for equity, you will have to pay 30% tax first, you can only have a sip of 2166 per month.
Now comparing annuity with lumpsum is hard because everyone will have different risk appetite at 55 year of age, so I am converting this into a subjective question with post inflation values after 30 years
Suppose you, after your retirement, are offered the following(adjusting above values for inflation):
Using the same calculation bt different ages:
Year till retirement: 25
Excel Calculator for simulation: https://docs.google.com/spreadsheets/d/1ajoOVOYR0aBdu2BIefZVYew2c939ropn
Equity returns: 12%
Debt Returns: 7%
Nps return(75 equity/25 debt): 10.75%
Years till retirement: 30( currently aged 25)
Tax rate : 30%
Inflation : 7%
Annuity rate: 8%(https://cra-nsdl.com/CRAOnline/aspQuote.html) This varies depending on your age, 7.5 to 8.3 is what I found for 55 year old available today with no return of capital)
Code:
Putting 4166 SIP(50k annually) in NPS at 10.75% for 30 years:
Lumpsum: 67L
Annuity: 44.67L
Since for equity, you will have to pay 30% tax first, you can only have a sip of 2166 per month.
Code:
Putting 2916 SIP in equity at 12% for 30 years:
Pre tax return: 1.03 cr
Post 10% LTCG: 93.7L
Now comparing annuity with lumpsum is hard because everyone will have different risk appetite at 55 year of age, so I am converting this into a subjective question with post inflation values after 30 years
Suppose you, after your retirement, are offered the following(adjusting above values for inflation):
- 8.8 L lumpsum with 3.9k monthly pension(which reduces by 7% evey year) untill your death
- 12.31 Lakh lumpsum today.
Using the same calculation bt different ages:
Year till retirement: 25
- 7.01 L lumpsum with 3.1k monthly pension
- 9.33L lumpsum
- 5.46 L with 2.4k pension
- 6.95 L lumpsum
- 4.06L with 1.8k pension
- 4.99L lumpsum
- 2.74L lumpsum with 1.2k pension
- 3.28 L lumpsum
- 1.42 L lumpsum with 600 pension
- 1.66 L lumpsum
Excel Calculator for simulation: https://docs.google.com/spreadsheets/d/1ajoOVOYR0aBdu2BIefZVYew2c939ropn