“With a 15-year deposit period and a 5-year extension, PPF is a long-term investment. Interest rates are annually compounded, with the current rate being 7.9 per cent.” - Ajit Narasimhan, head of savings and investments, BankBazaar.com
“Only around 10 per cent of India’s working population has got any kind of social security like EPF. It is important that the need for retirement corpus is estimated well in advance through the help of a financial adviser.” - Manik Nangia, director of marketing and chief digital officer, Max Life Insurance
“While investing for retirement, one should keep in mind that his investment should be able to beat inflation. Although the current inflation rate is in line with the Reserve Bank's expectations, inflation is highly dynamic.” - Rahul Parikh, CEO, Bajaj Capital
“People till the age of 40 years should ideally invest in equities to get high returns. As they move towards retirement age, they should transfer their holdings to debt ULIPs.” - Santosh Agarwal, head of life insurance, Policybazaar.com
One thing that K.G. Nandanan regrets the most is not starting a retirement investment plan earlier. The 60-year-old businessman from Bengaluru started thinking about it only five years ago. He has now invested in Public Provident Fund and some mutual funds. “I felt that PPF was giving a handsome return of 7.8 per cent annually, and I had Employment Provident Fund earlier which was part of my fund when I was employed with a firm. However, I feel that many of the standard retirement policies do not give high returns and one should invest smartly in PPF and mutual funds or SIPs. The aim is to have a good corpus and not just monthly pension,” he said.
Most people do not have a pensionable service and it is very important for them to start one on their own. Experts say they need to consider a few pointers before investing in a retirement or a pension plan. For instance, while planning for retirement, one should not only consider current expenses, but also keep in mind the inflation. Inflation adds to expenses in a significant way over a long period of time. EPF and PPF are good saving options, but if you are looking to create a substantial corpus for retirement, these options might not be able to provide inflation-adjusted returns. The current interest rate for PPF is 7.8 per cent (compounded annually) and for EPF 8.65 per cent.
“While investing for retirement, one should keep in mind that his investment should be able to beat inflation,” said Rahul Parikh, CEO, Bajaj Capital. “Although the current inflation rate is in line with the Reserve Bank's expectations, inflation is highly dynamic. Inflation is 2.36 per cent as on July 2017, compared with 6.06 percent in July 2016. Since we are estimating inflation rates, 20-30 years down the line, seek 10-11 per cent return on your investments. One can consider investing in National Pension System (NPS) to get desirable pension post retirement along with tax benefits. Another option is investing in mutual funds. Investing through systematic investment plans (SIPs) in order to get the benefits of rupee cost averaging is a disciplined approach. With SIPs in mutual funds, one may not need to time the market and can invest in multiple options leading to diversification and de-risking his portfolio within mutual investments.”
Investors nowadays have become more dynamic and tend to deviate from the traditional methods. “Today, as soon as people start working, acquiring cars and homes, even on loan, has become the new norm. The EMIs leave little or almost no disposable income to invest. The most common challenges that we see revolve around awareness. On one hand we have a mindset that believes 30 years is too early to start planning for retirement. On the other, there are people who aspire to build a lump sum corpus for retirement but due to lack of awareness about the right investment options, they are unable to choose the right investment options for themselves,” said Parikh.
In fact, convincing people about the importance of investing early is hardly a challenge these days. “The problem is lack of awareness among the masses. Once they understand the importance of retirement planning and know how to manage it, they are happy to go with investment options which give them substantial corpus along with adequate liquidity, tax benefits and an inflation-adjusted returns,” said Parikh.
Many experts say that starting early is the first and most important step to financially preparing for post-retirement years. By starting early, you utilise the power of compounding to grow your wealth. Manik Nangia, director of marketing and chief digital officer at Max Life Insurance, said social security investments like EPF and PPF might not be sufficient to meet the needs of retirement years, especially considering the inflation and the fact that with growing life expectancy retirement years are getting longer. “Only around 10 per cent of India’s working population has got any kind of social security like EPF. It is important that the need for retirement corpus is estimated well in advance through the help of a financial adviser and periodically reviewed to adjust as per the changing lifestyle. In most cases, post this analysis, it comes out clearly that EPF needs to be supplemented with other retirement plans also to maintain the standard of living,” said Nangia.
He said the initial earning years were the most important for retirement planning. “The initial years are not properly utilised and a major chunk of funds is spent on immediate needs and lifestyle related expenses,” said Nangia. “As the person gets into family life, children’s needs take precedence. As per a survey, child education is the biggest need for savings, followed by child marriage and then retirement planning. Another major impediment in retirement planning is that people dip into their retirement corpus for education and marriage of their children as well as for building a house, and are then left with sub-optimal corpus to meet their needs during retirement years. Maintaining a balance among these needs is very important.”
Most experts say the real challenge is deciding on the time to start planning for retirement. According to a Max Life-Nielsen survey, most Indians consider 40 years as the right age to start planning for retirement. “It is difficult to persuade a young workforce to start investing in retirement planning from an early part of their career. Another roadblock to early retirement planning is the preference of middle age Indians to invest in physical assets. Generally, parents are the first financial advisers and their advice to invest in a house comes in the way of investing in a financial instrument for retirement planning,” said Nangia.
Ideally, one should start planning for retirement funds in their early thirties so that he has a long time period to accumulate a bigger amount. “People till the age of 40 years should ideally invest in equities to get high returns. As they move towards retirement age, they should transfer their holdings to debt ULIPs so as to safeguard their maturity corpus from any unfavourable market movements. From the start, one should invest in market-linked products such as ULIPs to save money for the rainy days. If you are interested in higher returns, you should look at investment in equity-linked ULIP where the return ranges between 12-15 per cent over 10-15 years. If you are looking for a safer investment option, you must choose debt-linked ULIPs offering returns in the range of 8-9 per cent. The entire corpus that you get is tax-free,” said Santosh Agarwal, head of life insurance, Policybazaar.com.
Ajit Narasimhan, head of savings and investments at BankBazaar.com, said EPF and PPF, the two traditional long-term instruments used for building retirement corpus, provided the highest returns compared with other traditional debt instruments such as fixed deposits and National Savings Certificate (NSC). “With a 15-year deposit period and a 5-year extension, PPF is a long-term investment. Interest rates are annually compounded, with the current rate being 7.9 per cent. The interest earned on the invested amount is also exempt from taxes. Long-term investments work on the power of compounding. For instance, a monthly savings of Rs 12,500 for 30 years can help you build a corpus of Rs 3 crore at the end of the period (10.3 per cent return on investment). If you reduce this term by half, your corpus will come down to one-sixth at Rs 53 lakh. Starting early, and investing consistently and regularly are the key here,” he said.
Narasimhan said one should start planning for retirement early, ideally from the first year of the job. Also, one should project a realistic retirement age. “Just because our parents and grandparents retired at 60 years there is no guarantee that we will retire at 60, too. Organisations and jobs are getting younger by the day. We may be forced into retirement by the age of 45 or 50. Be realistic about retirement age,” he said.
There are some golden rules for planning a corpus post retirement. “Besides factoring in inflation, one should assume no clamp down in lifestyle and consumption needs. Human beings are inherently averse to change. More so when it is a scale down. Moreover, there would always be additional lifestyle expenses that come with age than you may think of as necessary now. At the same time, one should prioritise one's 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 in the foreseeable future,” said Narasimhan.
Also, one should project his expenses into monthly and annual expenses. Annual expenses include things like car insurance, medical insurance, house repairs and annual maintenance. Factor in all such expenses you undertake on an annual basis. One should also consider capital expenditure. “For instance, you will need to replace your car once in five years, need a television once in eight years, a mobile once in three years, and so on. These can be a major drain post-retirement. Once you arrive at these factors, sum these up and back-calculate when you intend to retire. Project a realistic life span for yourself of at least 80 years. Now use these numbers to calculate your corpus. Break this corpus in yearly and monthly expenses,” said Narasimhan.
The above computation assumes that you have adequate medical insurance. “Medical expenses are a major expense, especially post retirement, and you need to have a comprehensive medical policy that covers you and your spouse in case of eventualities,” said Narasimhan. “This is extremely important, as an ineffective policy or lack of a medical insurance can throw all your plans out of kilter since the need for medical intervention and scope of medical expense is very difficult to predict.”
The middle income group in India is known for its penchant for a rat race for personal assets and better living conditions. Add to this educational expenses and recreational or leisure costs. “This is putting an enormous stress on the income generated, and the gap is perpetual with liabilities looming large on mortgages or loans,” said S. Subramanyam, CEO of Ascent HR. “This leaves a very small sum, mostly by way of mandatory savings, for pension and, hence, the inability to plan properly. The Indian family puts a lot of importance on personal happiness and often ends up in a critical situation when it comes to funding high cost education or marriage or health costs.”
Subramanyam seconds Finance Minister Arun Jaitley's suggestion that India should move towards a pensionable society and PF withdrawals should not be permitted. “Unless you make this mandatory, PF savings will be utilised for all mid-stage life needs, making living at the old-age honourably a challenge,” said Subramanyam. “It would also be good to encourage savings towards pension which is proportionate to wage earned rather than fixing it at a threshold value as is the current practice. The government is continually striving to increase the minimum wages to improve living conditions and this can not be forgotten about retired people who will earn a fixed income.”
HOW TO CREATE A CORPUS FOR RETIREMENT
25-30 YEARS OLD
This is the time when an individual’s career sets off and there aren't many responsibilities. This is also the time to plan your financial future and start investing. At this age, you have the responsibility of planning your finances to reach your financial milestones—buying a house or getting a car. Try to save as much as you can. Invest in options that can provide good returns against inflation. Mutual funds, especially equity, are a good investment option at this point. Equity investment is known to give the highest returns. This includes individual stocks, diversified equity fund, sector equity fund and index funds. However, do not stick to equity alone. Find a few blue chip firms or well-diversified mutual funds and invest for a long term.
A rule of thumb is that you subtract your age from 100 and invest that much percentage of your saving in equity and equity mutual funds. If you are 25 years old, for instance, you should invest 75 percent of your savings in equity and equity mutual funds and the rest in high grade bonds or bond funds. Some experts say that at this age a disciplined approach is required towards the financial goal of retirement planning and a young salaried person working in the organised sector can also opt EPF, NPS and SIPs in mutual funds in order to build the corpus for retirement. Self-employed people can go for PPF instead of EPF. Exposure in equity should be between 70-80 per cent as the time horizon is long enough. It has been observed from the past that equity investments perform well over the long period.
31-40 YEARS OLD
In your thirties, your income will increase, and so will your expenses. Your responsibilities increase substantially. Not only will you be expected to handle tougher challenges at work, but also be needed to secure your dependents—spouse, children, and retired parents. If you haven’t already done so, 30s is the best time to get started on planning your finances for your short-, medium-, and long-term goals.
In the 30s, go for a versatile portfolio with investments in equity mutual funds consisting small- and mid-cap schemes, and target a higher rate of return. Real estate investment is another attractive avenue that you can explore. You can diversify your portfolio to reduce risk further. Debt funds, government securities and schemes like PPF are all excellent options. While investing, take care of tax implications on your returns. In addition to investing wisely, it is also essential to borrow wisely if you want to save well. Avoid expensive personal loans. Such adjustments will add up and help you save money on repayments, which you can then direct into your investments. While borrowing, select your loan products and lenders smartly.
Some experts say, at this age financial security becomes the topmost priority for any individual. While continuing on the same investment path, one can slightly decrease its investment exposure in equity investment options depending on their risk appetite. In debt category, pension plans should also be considered at this age.
41-50 YEARS OLD
In your 40s, your focus should be on maximising your retirement corpus and reducing liabilities. Begin by closing any unwanted loans like personal loans or credit card debt so that you can maximise your investment towards retirement goals. Try to prepay and bring down the tenure of your home loan. Reduce your investment in equity and focus more on debt instruments as you touch 40. Bring your equity-to-debt ratio to 60:40 or aim for 50:50 by the time you reach your mid 40s. Invest in tools that offer more surety of returns and focus on assured returns. PPF, pension plans, equity-linked saving schemes, fixed deposits, Kisan Vikas Patra and mutual funds should all be a part of your investment portfolio at this point. At this age, an individual should be financially secure and look forward to shifting his equity investment to debt category as by this age he is nearing his financial goals. In debt category, apart from pension plans and provident fund, one can look for secured bonds of renowned non-banking financial companies and housing finance companies.
51 YEARS AND ABOVE
By the time you are 50, you are most likely to have taken care of the financial burden of your children’s education and other major obligations in life. You can therefore take care of your finances by looking at your debts, with debt clearance accorded top priority, along with retirement investment. From this perspective, you will have the luxury to invest a higher sum of money without having to compromise on your current lifestyle. As you near your retirement, accelerate you switch from equity investments to debt instruments. Do this in a structured manner and redeem those investments that you need for short-term expenses while remaining invested in other investments and letting them compound.
Protection is just as important as investment. If you haven’t done so yet, invest in a substantial independent health cover. Without this, even a single health issue can take away virtually all your retirement savings. Buying individual health cover at 50 when you are active and still working would to be more pocket-friendly. By this age one should also shift 60 per cent of investments to the debt category as the financial goals of retiring at the age of 60 have almost arrived.