COVER STORY

In the half-light of dusk

Build a retirement corpus that beats inflation and lasts as long as you do

12-in-the-half-light-of-dusk-1

Bengaluru-based marketing professional Atul Kumar, 45, has been exploring investment options as he wants to build a corpus for his retirement days. He has been investing in Public Provident Fund (PPF) in the past five years. He could not invest much till he was 40 because he had to service a housing loan. He also has an Employee Provident Fund (EPF) account. “I have a term, health and a medical insurance running to help me and my family to deal with any contingency as it should not affect my investment cycle,” he said.

Individuals who are less than 40 years of age should have about 80 per cent of their investments in equity. - Adhil Shetty, CEO of BankBazaar.com
If you need to take care of spouse post retirement, you should opt for joint life annuity or at least annuity with return of purchase price. - Anoop Pabby, MD and CEO, DHFL Pramerica Life Insurance
Fourth generation ULIPs not only come with lower cost but also have additional benefit for the family and child education planning. - Santosh Agarwal, head of life insurance at Policybazaar

Though there are many options available for Kumar, the norm of retirement planning is, the earlier you start investing, the better your chances of creating a good corpus for retirement. For instance, if you are 30 years old and invest Rs 1 lakh in a mutual fund growing at 15 per cent annually, you get Rs 16 lakh when you are 50. But, if you make the same investment at 40, you get only Rs 4 lakh when you redeem it ten years later. That is the power of compounding.

“Assume that your desired retirement age is 60. If you are 30 now, you have 30 years to reach your goals. This is a good length of time to accumulate a decent retirement corpus with low-risk instruments,” said Adhil Shetty, founder and CEO of BankBazaar.com. “Delaying investment means having to take higher risks later in order to achieve the same goals. You would have to invest in riskier funds, reduce your retirement corpus to reduce risk, stretch your retirement age, or increase your monthly investments to meet the goal. Don’t postpone building that corpus. The sooner you start, the better.”

So, what is the best time to start retirement planning? The best time to start investing is right from the first salary of your first job. Start saving and investing for retirement when your start working. With fewer responsibilities one can invest more money than when family responsibilities and home loan and car loan EMIs eat up most of your income. Invest regularly each month right from your early 20s to build a huge retirement kitty and enjoy a comfortable retirement. The Pension Fund Regulatory and Development Authority, the pension regulator, is thinking of even allowing minors to open National Pension System accounts. This would take investing for retirement to an entirely different level.

“More than 45 per cent of the workforce in India does not save for retirement. And most of those who save for retirement are not saving enough. Many people who are into their 40s have not planned for retirement. They are more concerned about their children's wedding,” said C.S. Sudheer, founder and CEO, Indianmoney.com, a financial education company.

The thumb rule of investing for retirement is to invest 20 per cent of your income in your early 20s. Make this 30 per cent in your 30s and 40 per cent in your 40s. “It is never too late to do retirement planning. You can start even in middle-age or in the 40s. The first thing you must do is closing personal loans or credit card debt. These loans charge very high interest. If you have taken an education loan to fund your child’s education, transfer the remaining part to them if they are in a position to pay it off. This will give you money to invest for retirement. If you have a home loan, consider pre-payment to bring down the tenure and repay it before retirement. Besides this, reduce equity investments and focus on debt as you get closer to retirement. Focus on investments which give assured returns rather than the high-risk, high-reward game,” said Sudheer.

One should invest in low-risk instruments such as fixed deposits, PPF, pension plans and debt funds for retirement planning in 40s. Besides, one must make sure that one has health insurance, which would be handy in protecting one's savings if there is a medical emergency.

An important aspect of retirement planning is that it should beat inflation. Equity is the best asset class to beat inflation in the long run. “Equity funds in India have generated close to 17 per cent compound annual growth rate over the past 10 years. That is 8-9 per cent above inflation. When you compound this annually, it gives you significant amount of wealth over an extended period of time. The typical approach is, the longer the period for retirement, the greater the allocation to equity. Individuals who are less than 40 years of age should have about 80 per cent of their investments in equity and the assumption is, at least 40 per cent of their income goes towards investment products. My observation is that anything less than these numbers will always lead towards a sub-optimal post-retirement corpus,” said Shetty.

Inflation has been around 8 per cent in the past, and investments that give returns below this might not help attain retirement goals. Experts agree that investments in stocks and equity mutual funds, if held for long term, are inflation beaters. Though volatile in the short run, they are quite safe in the long run, making them an excellent investment for retirement. “If education inflation is 10 per cent and medical inflation around 20 per cent, one definitely needs a great investment to beat inflation and enjoy a huge retirement corpus. Equity and equity-oriented funds have given 10-15 per cent returns in the past 10 years. These investments are tax-friendly and the tax savings can be reinvested to give more returns. ELSS has a lock-in of three years and it forces you to stay invested in the long run,” said Sudheer.

In case you have a low risk appetite, you can consider investing in monthly income plans (MIPs) from mutual funds. MIPs invest 15-20 per cent of their corpus in equity and the rest in debt. Studies have shown that MIPs have given 8-9 per cent returns over the past 10 years. Some experts even believe that mutual funds are great for retirement as top performing mutual funds are consistent market beaters. Large-cap mutual funds have given 10-15 per cent annualised returns over the last 10 years. Even balanced funds have given 11 per cent annualised returns over the past 10 years. Top performing equity-linked savings scheme funds (a type of mutual fund), which invests mostly in equity, has given 18 per cent annualised returns over the past five years.

Experts are also of the opinion that one can invest in National Pension System (NPS) that invests 50 per cent in equity. “NPS has one of the lowest fund management charges and the lock-in forces you to stay invested for a long term. You can withdraw only after 15 years.

You can avail a tax deduction up to 01.5 lakh a year under Section 80C of the Income Tax Act and an additional deduction of 050,000 a year under Section 80CCD(1b). The contribution from one's employer, up to 10 per cent of basic salary and dearness allowance, is eligible for tax deduction. “One of the most interesting things about NPS is that one can withdraw only 60 per cent of the corpus at maturity, out of which 20 per cent is taxed. One has to compulsorily get an annuity plan with the remaining 40 per cent and eventually one enjoys a pension after retirement,” said Sudheer.

Even PPF is a good investment for retirement for the risk-averse. You enjoy steady risk-free returns and PPF currently offers 7.6 per cent rate of interest. It is up for review every three months. The PPF interest rate is much higher than FDs and most other fixed income securities. PPF is a great tax-saver as the money invested will get tax exemption up to Rs 1.5 lakh under Section 80C. The money accumulated and withdrawn at maturity is also tax-free.

It is also equally important to have funds to deal with contingencies when one is planning for retirement. Insurance is one of the best ways to deal with an emergency situation. “Insurance is required for everyone, regardless of whether you have dependents or not. Life and health insurance are absolutely essential. Even if you have a group cover, a personal policy is always prudent. The earlier you buy, the less the premiums throughout. Get yourself adequately and smartly covered. Keep in mind that just purchasing either one of them may not be enough at all. Also, be very clear about what the policy covers, and the exclusions and the other terms and conditions. Ultimately, an insurance is meant to protect our near and dear when we are unable to do so. So make sure that you do all the due diligence when you buy an insurance policy,” said Shetty.

Adhil Shetty Adhil Shetty

A key step of financial planning is estimating the post-retirement expenses, as one mistake that most people make in projecting cash flow requirements post retirement is visualising a ramp down in lifestyle and consumption needs. “Do not assume any clamp down in lifestyle and consumption needs. Human beings are inherently averse to accepting change. This is more so when it is a scale down rather than a scale up. Moreover, there would always be additional lifestyle expenses that come with age that you may think of as unnecessary now,” said Shetty.

Prioritise your expenses into three categories—must have, nice to have, and can do without. Try to live without the 'can do without' before you retire. “This will help you address the previous point as well as give you a more realistic picture of what your expenses are currently and what they could be like in the foreseeable future,” said Shetty.

Experts suggest that there should be provisions in retirement plans for spouse and dependents who may outlive you. “Most pension plans when they vest offer the option to transfer the balance into an annuity product. Such an annuity product will have multiple options. If you need to take care of spouse post retirement, you should opt for joint life annuity or at least annuity with return of purchase price. But do remember that such a choice would involve letting go of the annuity that you will receive now. You might lose up to 60 per cent of current annuity by opting for providing continuance of pension post your death. For example, instead of Rs 25,000 per month, you might get just Rs 10,000 a month if you choose the joint life option,” said Anoop Pabby, MD and CEO, DHFL Pramerica Life Insurance.

The fourth generation unit-linked insurance plans can come in handy here. “Fourth generation ULIPs not only come with lower cost but also have additional benefit for the family and child education planning such as waiver of premium option. In such a case, the sum assured is paid to the nominee and all the future premiums will be waived off. Moreover, the insurance company will invest all the future premiums in the market and policy will continue till the policy term,” said Santosh Agarwal, head of life insurance at Policybazaar.com.

Anoop Pabby Anoop Pabby

Analysts point out that most people do not have clarity on how long they should stay invested for retirement plans and when they should start getting returns from the plans. The timeframe for such investments depends on your retirement. The longer the timeframe, the better the returns. Ideally the person should stay invested for 10-15 years. Some experts say one must get a deferred annuity plan. In this plan one pays premiums across working years till a vesting age. Such a plan helps one build a corpus across the tenure of the plan.

At vesting age (close to retirement), one also has the option to encash a third of funds and use the balance two-thirds to purchase an annuity plan. One can also avail section 80C tax deduction, up to Rs 1.5 lakh a year, on the premiums paid to the insurer.

EPF and PPF, the two traditional long-term instruments used for building ones retirement corpus, are good but just not good enough. They provide the highest returns among traditional debt instruments such as fixed deposits and National Savings Certificate. “With a 15-year deposit period and a five-year extension, PPF is a long-term investment. Like all long-term investments, it works on the power of compounding. However, the returns from PPF is only 7.6 per cent. So you will need to stay invested for a very long time. For instance, a monthly savings of Rs 15,000 for 30 years can help you build a corpus of Rs 2 crore at the end of the period. However, if you reduce that period by half, your returns will come down to one-fourth at Rs 50 lakh. So, if you have a long investment window, EPF and PPF can be an option. Taking inflation into account, Rs 2 crore may not be a sufficient retirement fund 30 years down the line,” said Shetty.

Many people think retirement planning is unnecessary. According to a study by HSBC, about 47 per cent of working people in India have not saved or invested for retirement. “Many people postpone retirement planning. Gen Y prefers to invest in PPF, EPF, FD to meet short-term goals like buying a house or a car. Planning for retirement is not a priority. The youth in India must invest for retirement through investments which give inflation-beating returns. Also many citizens in India support family members. They have to focus on money for their needs leaving no money for retirement. This can be very dangerous. Access to good healthcare means people are living longer. You will live for many years after retirement. There would be no money for retirement with higher lifespan and no retirement planning. Also, many people in India seek financial advice from family and friends. Studies have shown that more than 80 percent of pre-retirees seek advice from family and friends. Not getting the right financial advice from financial advisers or financial professionals is the main reason many citizens do not have money for retirement,” said Sudheer.

Santosh Agarwal Santosh Agarwal

A report by National Sample Survey Office shows that 82 per cent of people above 60 years who reside in rural areas are supported by children. It is 80 per cent for urban areas. Many citizens believe that their children will support them in retirement. Also, many citizens take care of their children and fund their education, getting education loans if necessary. Even after their children get jobs and are able to pay back loans, parents continue to make the repayment, leaving no money for their retirement.

“If people's savings are meagre at any intermediate stage, say 35 or 40 years, they lose hope and abandon the efforts needed to shore up the retirement fund,” said Pabby. “You have to stay the course. Take good financial advice to reach the same goals with new stratagems. Sometimes when the savings seem to have done very well, people tend to splurge as they think they are doing well vis-a-vis their retirement goals. Here, too, a balance would have to be struck and random dipping into the retirement bucket should be avoided.”

TAGS