What comes to your mind when you think of retirement? Vacations, spending time with loved ones, or maybe a life by the beach? Reality could be quite different though. Max Life Insurance’s India Retirement Index Study reveals 9 of 10 urban Indians worry about their savings not lasting through retirement. Why are we not able to save enough? The primary reason is procrastination. Immediate goals such as buying a house or saving for children’s education often become a priority and retirement planning ends up being put on the backburner. Well, if you do not want to spend your golden years fearing a lack of funds later on in life, it’s time to get proactive about charting out your retirement plan.
Now the question is, where to start? It’s not enough to have a vague idea. While shelling out a monthly amount is good, it might not be much to lead a self-sufficient life. Hence, the first step is to determine how much time you have before retirement and how long you expect to live post-retirement. Once you know the answer to these two, you will be in a better position to plan.
TIME IT RIGHT
You might have just started your first job or you might be in your 50s—instead of being baffled by how early or late you are, start today. The more you delay, the more aggressively you will have to save. For example, if your age is 20 and you want a corpus of Rs 5 crore at 60, you would need to save only Rs 4,250 monthly for the next 40 years, assuming the rate of return of 12 per cent. However, starting at 50 will mean saving Rs 2.17 lakh each month to have Rs 5 crore in the next 10 years. Starting early has its advantages as it takes the pressure off the last leg. It gives your money more time to grow, as the power of compounding can multiply it exponentially over time. If you start saving Rs 4,250 per month at the age of 30, it will accumulate to only Rs 1.48 crore. The 10 years of compounding can give you an edge of over Rs 3 crore.
“The most common mistake investors make is not to set their quantified retirement age and corpus at an early age. They plan for their retirement after turning 35, which is not a right habit. Each investor should plan for retirement from their first job at around 22 years of age and build a long-term portfolio with the multiplier benefit of compounding. Both discussed individuals will have a significant difference in their retirement corpus, even if they invest the same amount of money, that too in the same product, due to the higher power of compounding for the additional 13 years in the second person’s case,” says Amit Jain, Chief Executive and Co-founder of Ashika Wealth Advisors. After figuring out the number of years you have before retirement, the next step is to determine the number of years you expect to live as it helps in calculating the retirement fund you will need.
KNOW YOUR NEEDS
Another reason why people run out of funds is the fact that they tend to ignore inflation while planning their retirement. This could be a costly mistake as calculations show that if you spend Rs 12 lakh annually at the age of 50, then to meet the same expenses you will require Rs 24 lakh after 10 years, assuming a 7 per cent rate of inflation. It is important to note that inflation reduces the purchasing power of money. This is why your grandparents are shocked when they see current vegetable and milk prices. Like many, they also might have assumed that they could continue buying the same amount of goods and services without realising their money hasn’t grown the way the cost of living has.
To tackle inflation, prepare a break up of your current expenses and then map the same to a post-retirement scenario by adjusting it against inflation. Let’s work out the math. How to decide how much corpus one may need at the time of retirement? Lovaii Navlakhi, Chairman, Association of Registered Investment Advisors (ARIA), says there are multiple factors to be considered such as the amount of regular expenditure you have on a monthly basis based on today’s value, duly inflated till the start of retirement, any one-time expenditure such as holidays, gifts, replacement of a car, life expectancy, legacy one needs to leave behind, inflation expected during retirement, and returns expected on investment during retirement.
“Once these values are determined, one can mathematically arrive at the corpus needed at the time of retirement. Sometimes, one may only estimate a range rather than an absolute number; in that case, one can arrive at the range of corpus required at the time of retirement.” To help you ascertain how much you would need at retirement, we have prepared a table. (See table How to Calculate Your Retirement Corpus). “Each investor needs to find out his own retirement corpus depending upon his monthly expenses and keeping an eye on inflation in the economy. For India, we can assume that the retirement corpus should be 16 to 17 times of your family’s annual expenses (at the time of retirement). I am presuming India being a growth economy, long-term inflation would range from 5 per cent to 7 per cent on the lower side,” says Jain.
ASSET MIX
Asset allocation is to investment what oxygen is to human life. It means how to invest money into various asset classes keeping in mind your risk tolerance. It is important to invest in the right asset class as it will decide the kind of returns you will get. However, the mistake that people make while deciding on this is to become very conservative and ignore equity altogether or have very less exposure. But to get inflation beating returns, one needs to invest in high-growth assets. The S&P BSE Sensex has given a return of 184 per cent over the period of 10 years, while gold has given only 29 per cent (in dollar terms). The numbers clearly show why there needs to be equity exposure. Apart from equity, here are some of the other avenues that you can consider to build your corpus along with a steady stream of income post retirement.
PUBLIC PROVIDENT FUND
Public Provident Fund (PPF) is one of the best saving avenues that offer guaranteed and entirely tax-free returns along with Rs 1.5 lakh deduction on the investment under section 80C of the Income Tax Act. Currently, it offers 7.1 per cent interest rate, but the pre-tax yield from PPF comes to around 10.14 per cent (assuming 30 per cent tax bracket) and that too is guaranteed. The tax benefits offered with PPF clearly make it one of the most sought-after retirement tools. A PPF account is for 15 years, after which it can be continued for five years, provided you submit a renewal letter within one year of maturity. You can also use a PPF account for creating a regular stream of tax-free income by withdrawing a certain amount every year post retirement. However, the downside is you are allowed to invest only Rs 1.5 lakh in a PPF account in a particular year.
NPS
National Pension System (NPS) is a low-cost and tax-efficient retirement savings account. Apart from 80C deduction, it also offers an extra deduction of Rs 50,000 under section 80CCD (1B) of the Income Tax Act. Unlike PPF, it gives you the flexibility to choose between the two options—active choice and auto choice. In active choice, you can invest your money across four fund options. Equity (E) invests in equities with maximum exposure of 75 per cent, while Corporate Debt Scheme (C) invests in bonds issued by public sector undertakings (PSUs), public financial institutions (PFIs), infrastructure companies and money market instruments. The Government Securities (G) scheme invests in securities issued by central government, state governments, and money market instruments and the Alternative Investment Funds (A) scheme invests in instruments such as CMBS, REITS, AIFs, etc. In auto choice, your funds have an equity exposure of 25-75 per cent that goes down as the subscriber approaches maturity. It also offers you two account types—Tier I and Tier II. While investment in a Tier I account is compulsory, Tier II is optional and allows withdrawals. As on February 11, Scheme E gave average one-year return of 15.69 per cent against the benchmark of 16.59 per cent. Scheme C returned 6.20 per cent against the benchmark of 6.69 per cent over the last one year. Scheme G gave an average return of 3.8 per cent, while Scheme A returned 8.97 per cent. Like a PPF account, NPS also comes with a lock-in period. It allows you to withdraw only 60 per cent of funds tax-free at the age of 60, while the remaining 40 per cent has to be used to buy annuities. In case of early exit, you have to annuitise 80 per cent of your money. Pension is a taxable income in the hands of the recipient.
MUTUAL FUNDS
Mutual funds are one of the best savings tools for long-term goals such as retirement. This is because over the period, equities tend to give higher returns than other asset classes. Experts say for equity exposure, one should save through mutual funds in a systematic investment plan or SIP. Apart from plain-vanilla products, there are also retirement-specific mutual fund schemes. “Both solution-based products and the plain-vanilla ones have the same underlying assets. The only difference you can observe is the proportion of each asset class keeping different maturity periods in mind. Hence, investors must analyse the weightage of each asset class. Each investor can choose a suitable product depending on his risk appetite and time horizon,” says Jain.
EQUITY EXPOSURE
“Retirement planning is always a long-term investment and it has to be looked at in two phases. First is the accumulation phase where you invest over the years to build the retirement corpus and the other is the withdrawal stage where you use the corpus post-retirement. Equity is the best asset class that can be used during the accumulation stage,” says Harshad Chetanwala, Co-founder, MyWealthGrowth.com. “A young investor planning for retirement should invest in equity to build the corpus. It is applicable for all investors who want to start investing for retirement and have more than seven years to build it. Some allocation in debt can be considered in the form of EPF or PPF. Only equity-based investments are good enough to create a retirement corpus over the long term,” he adds. Another advantage of investing in MFs is the regular stream of income you can create by transferring funds from equity to debt schemes with a systematic withdrawal plan as one nears retirement.
This not only protects from the volatility of the stock market, but also helps in reaping tax benefits, especially if you are in the higher tax slabs. If you invest Rs 20 lakh in an FD at 7 per cent interest rate per annum, your tax liability will be Rs 42,000. However, if you invest in a debt mutual fund, and withdraw every quarter through SWP, the tax liability will come to around Rs 1,730. One important point to note is that there is a tax exemption of Rs 50,000 per annum for senior citizens under section 80TTB. Chetanwala says, “Along with investing, it is equally important to create a proper portfolio for the withdrawal stage. For the post retirement stage, it is a good strategy to invest across equity, debt and even small savings schemes for your monthly withdrawal. The allocation of equity will reduce once you near retirement, but you will always have to retain some allocation irrespective of the age.”
PENSION PLANS
There are two types of pension plans—deferred and immediate. Deferred pension plans allow you to accumulate a corpus through regular premium or single premium payment over a policy term. Here, the annuity starts at a later stage as per the period chosen at the time of buying the policy. It may be plans, pension starts immediately without any waiting period. Annuity plans typically give 5-6 per cent return per annum. (See table Best Annuity Plans). Vivek Jain, Head of Investments at Policybazaar.com, says, “The two most important things that one requires post retirement are the love and support of dear ones and a fixed regular income as a replacement of salary to take care of daily expenses. If you are someone who has already retired or is retiring soon, and want a regular and guaranteed income in your sunset years, investing your hard-earned money in a suitable annuity plan is the answer.”
“Under an annuity plan, you pay a lump sum in the accumulation between 1 and 10 years. After the completion of the tenure, the pension is provided to the insured. In immediate annuity plans, pension starts immediately without any waiting period. Annuity plans typically give 5-6 per cent return per annum. (See table Best Annuity Plans). Vivek Jain, Head of Investments at Policybazaar.com, says, “The two most important things that one requires post retirement are the love and support of dear ones and a fixed regular income as a replacement of salary to take care of daily expenses. If you are someone who has already retired or is retiring soon, and want a regular and guaranteed income in your sunset years, investing your hard-earned money in a suitable annuity plan is the answer.” “Under an annuity plan, you pay a lump sum in the accumulation period and get regular payments as long as you live or for a pre-specified fixed period. Annuity plans are specifically designed to meet long-term retirement needs of people with a decent corpus for investment,” he adds. Last but not least, Employees’ Provident Fund is an important spoke of the retirement wheel. The best advice is never to withdraw from EPF and let it grow to reap the benefits of compounding.
By accurately calculating your retirement needs after taking into account the inflation and not putting all eggs in one basket, chances are high that you would be able to fulfil all your retirement dreams quite comfortably.
