PF Alone Won’t Be Enough. ‘Start Early’ to Save ‘More’ for Retirement.

For the first several years of their career, most individuals do not give retirement the importance it deserves. And why would they? In their mid-20s, retirement for these young individuals is still 30+ years away. As a result, the only thing that gets contributed towards their retirement is their Employer’s Provident Fund (or EPF). That too if they don’t make the mistake of withdrawing it while switching jobs.

But most people are generally under the assumption that the EPF savings alone will be enough to meet their retirement savings requirements. But that is not right. Your EPF will never be enough for your retirement if you consider the high inflation these days.

I am not saying that EPF is bad. All I am saying is that EPF is not enough. And you need to supplement it with other savings and investments to have a proper retirement corpus.

Retirement Planning is rightly referred to as the Nastiest Problem in Finance. It’s not easy to know how much is enough and most people realize very late that whatever they have saved to date may not be enough. The problem with the goal of retirement is that you have just one shot at it. And secondly, you don’t get any loans for retirement, unlike the ones you get for other goals like housing loans, children’s higher education loans, etc.

So, in addition to your EPF, you need to invest more in other suitable instruments to ensure that you are able to save up a big enough retirement corpus which can last a lifetime after you retire at 60 or if you decide to go for early retirement.

If you read the previous paragraph, you will see I chose the words “other suitable instruments.” So, what are these other alternatives that you need to consider for long-term goals like retirement planning?

Let’s have a look –

1 – Voluntary Provident Fund (VPF) and Public Provident Fund (PPF) – VPF allows you to increase EPF savings by additionally making extra voluntary contributions. To read more about VPF, do read this link. PPF needs no introduction and I am sure you know it’s another good option as well.

2 – Equity Mutual Funds – For goals like retirement which are several decades away, it is highly recommended to have a reasonable allocation to equities in the retirement portfolio. Equity funds have comfortably delivered inflation-beating returns in the long term.

This can easily be achieved by doing monthly SIP in equity funds with discipline. In my view, there is a very important role of equity in most people’s overall retirement plans.

3 – Endowment / Savings Plan – Not everyone who is looking for alternatives to EPF is comfortable with equities. So many such people gravitate towards Savings Plans, which are commonly referred to as endowment plans. It’s a hybrid product that offers dual benefits of insurance and savings. The insurance aspect provides the investor with a life insurance cover. If something happens to the investor during the policy term, their family members will receive financial benefits. But, if one survives the entire policy tenure, they get the maturity proceeds, which include loyalty additions, bonuses, etc.

These savings plan are long-term financial instruments where you need to pay the premium for about 20+ years. So, the sooner you purchase the policy, the better. This will also give you enough time for your investments to compound and grow big.

While pure life insurance will give a bigger cover, these savings plans do offer a comparatively smaller life cover because they also offer investment (with maturity benefits). And when one buys these assured savings plans in their 20s, they can get higher coverage at comparatively affordable premiums. Also, they can afford to buy a policy with a longer policy tenure. These policies are not only used for retirement but for other savings needs of the families as well.

4 – NPS – NPS is a retirement-dedicated savings product. Since this single product allows savers to manage allocation to both equity and debt, it makes NPS a good option for retirement savings. One can even opt for Auto NPS choice. But the NPS maturity requires the mandatory purchase of an annuity worth a minimum of 40% of the accumulated NPS corpus. And the pension from this annuity is taxable. The remaining 60% is tax-free and available as a one-time lump sum payment. This mandatory annuitization of savings makes NPS suitable for only a section of retirement savers and not everyone. Read How to use NPS for retirement savings to understand it better.

When saving for retirement, it’s important to have proper asset allocation and diversify across suitable and well-chosen products.

And even before you go about picking the right product for retirement, please make an effort (or talk to a fee-only SEBI RIA investment advisor) to find out what your retirement corpus target should be. And then, invest accordingly to ensure that after 2-3 decades of savings, you have a large enough retirement corpus accumulated.

Why should you start saving early in life?

When you are young (in your 20s and 30s), retirement looks very far off at 60. But the benefits of starting early can never be easily matched easily by other approaches (like even investing more in the later years). This sounds a bit hard to believe but I did some calculations and was surprised. Let’s compare 2 friends who decide to start investing at different ages.

First-person starts investing at 23 and saves Rs 1.5 lakh every year for the next 10 years. He then stops (at age 33) and doesn’t invest anything till his retirement at 60. If we use a very reasonable 8% return assumption, then at 60, this person’s corpus would be about Rs 2.02 Cr.

Now his friend starts investing at age 31 and continues investing Rs 1.5 lakh every year till his retirement at 60. Remember that the first person just invested for 10 years and stopped. This person invests from age 31 to 60, i.e., for 29 years.

Do you know how much this person will have at 60? He will end up with a corpus of Rs 1.83 Cr – which is lesser than the first guy at Rs 2.02 Cr.

So, all said and done, the best piece of advice that I can give you for retirement savings is to simply START EARLY. Starting small is still okay. Don’t worry. Just start. Don’t delay any further.

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