Is just EPF good enough for Retirement?

Is just EPF good enough for Retirement?

That is an important question. And unless you contribute a lot of money every month to Employee Provident Fund (like these HNIs investing in EPF), chances are that your EPF corpus may not be sufficient for your retirement planning.

Before the recent EPF rule change to tax interest on contributions above Rs 2.5 lakh per year in EPF, factors like fixed reasonably high returns (8.5% is current EPF interest rates) and its tax-free status made EPF one of the most solid vehicles for building long-term savings for retirement.

But not everyone invests a very high amount in EPF that will make it alone sufficient for retirement. And hence, they need to invest more in some instruments to ensure that they are able to save up a big enough retirement corpus which can last a lifetime. And that is because as a retiree, you would not want to run out of money before running out of years.

For most small savers, if you are under the assumption that the EPF corpus you have been building would be enough to meet your retirement needs, then you are mistaken. You shouldn’t rely just on EPF and regular mandatory contributions for your retirement needs.

Do note that I am not trying to write off EPF as an investment option. In fact, I would say that when it comes to retirement, it is one of the most solid and best debt products that Indians have access too. The EPF (till very recently) enjoyed the EEE (exempt-exempt-exempt) status, i.e. it is tax-free at the stage of contribution, interest amount accrual as well as maturity amount withdrawal (now interest on employee contribution above Rs 2.5 lakh per year will be taxed). All I am saying is that you need more than EPF. You need to look beyond EPF when it comes to retirement planning.

Equity is one asset class that has the potential to generate inflation-beating returns in the long term. And EPF is primarily a debt product giving fixed returns. So EPF alone may not help you accumulate the required retirement corpus.

Unless you are a totally risk-averse investor, you need to invest in equities too. To ensure that you don’t outlive your retirement corpus, it is very important to have a significant equity exposure (at least during the initial working years). Also, just looking at debt as an investment in the long run goes against the basic idea of the risk-reward spectrum. In the long term, equity delivers better return than debt.

There is an urgent need to consider equity as part of the overall retirement plan.

So when investing for your retirement, make sure to include equity products like equity mutual funds. This can be in addition to your ongoing contribution to EPF and additional voluntary contribution to VPF. As for how much equity exposure you should for your portfolio will depend on your risk profile, etc. If you are unable to figure this out, make sure to consult an investment advisor to help you with it.

There is another factor to keep in mind. If you go through the historical EPF interest rates, you will see that gradually, EPF interest rates are headed down. Also due to the social angle of EPF, the government till now has been paying higher than financially prudent interest rate to EPF account holders. But how long this benevolence will continue, is anybody’s guess.

So there is uncertainty about future returns as well. Who knows what might happen?

And hence, it’s best not to have all eggs in one (EPF) basket.

Better to diversify.

That too in suitable asset classes like equity (via equity funds) in addition to debt (which can be done via EPF + VPF, PPF and NPS Conservative portfolio).

The taxation of EPF interest in itself should be a wake-up call for investors who until very recently thought that EPF interest will always remain tax-free. One more thing, the young generation of India has no pension security. So you all are really on your own. This is a no-pension era of India that requires you to prepare yourself for the coming retirement. It’s non-negotiable.

So what should you do?

Best is to do a retirement planning exercise (which is part of full financial planning) to figure out what is your target retirement corpus and how much you need to invest for retirement every month. Your EPF can continue as a statutory contribution. Then depending on your risk profile and chosen asset allocation strategy, you can decide the mix of equity and debt in your retirement portfolio. If additional money is to be invested (in addition to EPF contribution), then you can do it via a combination of VPF (Voluntary Provident Fund) and PPF. And yes, there might still be a case (even after new taxation) to invest more than Rs 2.5 lakh in EPF. As for equity component, you can go for SIP in the right equity funds (find the best mutual funds to invest).

Related Reading: How to choose between VPF Vs. PPF?

So that’s it. Give your retirement the importance it deserves. And as far as the question of ‘Will your Provident Fund be enough for Retirement?’ is concerned, I would say that there really is a need to going beyond just EPF. You need to invest more and in the right instruments.

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