We discuss how retirement products like the employee provident fund (EPF), the National Pension Scheme (NPS) and the Unified Pension Scheme (UPS) can be incorporated into a retirement plan.
Over the years, many readers have doubts about how to go about this, hence this article. At the time of writing, the UPS is not yet in force, but it is likely in force when you are reading this.
The retirement planning calculation will differ depending on whether you are part of the EPF, NPS, UPS (or the old pension scheme) or any superannuation plan. Regardless, the freefincal robo advisor tool can factor in the following variations.
EPF: Almost everyone reading this should earn more than Rs. 15,000 a month and, hence, not eligible for the employee pension scheme. So, the entire employee + employer contribution (as per applicable limits) goes to the EPF.
- Existing EPF corpus value should be treated as fixed income and included in the retirement portfolio’s asset allocation. The future value of this corpus at the time of retirement should be projected with a reasonable interest rate.
- The net retirement corpus required should factor in the future value of this corpus.
- The total investment amount required to achieve financial independence after retirement should include the total EPF contribution.
- Since the total EPF corpus will be available in the hands of the retiree, it can be used as part of a bucket strategy.
NPS: The NPS is way more complex, with multiple withdrawal options. See: How to optimize NPS withdrawals after retirement. The exact route will become clear only when one is close to retirement. So if that is still some distance away, it is better to choose a simple option.
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- The retirement portfolio’s asset allocation can include 60% of the NPS corpus (current value). The future value of this corpus at the time of retirement should be projected with a reasonable interest rate.
- The net retirement corpus required should factor in the future value of this corpus.
- NPS asset allocation is quite tricky. I have a constant 15% equity exposure in my mandatory NPS and treat it as fixed income. If you have higher equity or a variable asset allocation, then it is better to use it as such. Include the fixed income part of NPS in your total fixed income assets, and the same is true for equity. Then, compute asset allocation.
- 40% of the NPS corpus will go towards an annuity purchase, and one can estimate the income from this reasonable interest rate. This income should be considered while computing the required net retirement corpus and investment. The freefincal robo tool considers three income streams (pension, rent, dividends, etc.). The rate at which these increase each year and their duration can also be adjusted.
UPS (or the old pension scheme)
- The retirement corpus should include Only the contributions we can redeem at retirement.
- The pension will be indexed with a dearness relief and grow at about 5-6%. This will significantly lower the the total corpus required.
- In some situations (old pension schemes, superannuation schemes) a commutation option will be available. That is, one can withdraw a part of the lump sum and opt for a lower pension. This will become clear only close to retirement.
Some other variations may not be mentioned above, but the essential steps remain the same.