Find out how you can make up for lost time if you haven’t saved enough for retirement.
By Babar Zaidi, ET Bureau | 18 Nov, 2013, 09.41AM IST | Economic Times

Start saving early. Nearly 54% of the retirees in an HSBC survey said this was the best financial advice they had ever got. Not all of us are so lucky, and most Indians get serious about retirement savings only in their 40s. Have you also frittered away the early bird advantage and not saved enough for retirement? There can be several reasons for your nest egg being smaller than that of others your age. Perhaps you didn’t have a high income in your early years. Maybe you made the wrong investment choices or suffered a financial setback, which ended up wiping out all your savings.

Whatever the reason, there is no need to panic. You have lost out on the golden years of compounding, but it’s never too late to start. Our cover story this week is for investors who should have saved more when they were younger, but couldn’t.

You can make up for the lost time and put your retirement back on track if you follow the strategies explained in the following pages. Of course, this will require you to invest in a disciplined manner, make certain lifestyle sacrifices and even tweak your retirement schedule. If you are ready to do all this, you have a fairly good chance of retiring the way you have always dreamt about it.

How to save Rs 1 crore in 15 years

The graphic above shows how disciplined investing can help you amass Rs 1 crore in 15 years. As the risk goes up, the required investment per month goes down. Your choice of the investment option should be guided by your ability to save the required amount and the risk you are willing to take. Insurance policies are low-risk but offer low returns and, therefore, require a very heavy investment. Equity funds have the potential to give high returns but also carry high risk. Instead of concentrating your investments in 1-2 of these options, you should ideally have your retirement savings spread across all these options.

FOCUS ON SAVING, NOT RETURNS

Don’t we all want to earn high returns from our investments? When you are in your 40s, haven’t saved too much, and have only 12-15 years to go for retirement, your focus should not be returns, but the quantum of your savings. Just tighten your belt and start saving aggressively, even if it means cutting down on your lifestyle. Any windfall, tax refund or other gain coming your way should be promptly salted away for your retirement.

Paying yourself first is a key tenet of financial planning. Advisers say you should put away at least 10-15% of your income into retirement savings every month. Given your situation, you might have to put away a bigger portion to reach your target. Do you have the necessary discipline to save month after month? One effective way of ensuring this is by opting for a higher deduction in the Voluntary Provident Fund (VPF). If you are covered under the Employees’ Provident Fund, you can ask your employer to deduct more than the mandatory 12% of your basic income that flows into your PF account every month.

The additional contribution will earn the same 8.5%, be eligible for deduction under Section 80C and will be tax-free on withdrawal. Delhi-based school teacher Rajini Singh (see picture) is contributing Rs 5,000 to the VPF every month over and above the mandatory contribution to the PF. “The money gets deducted from my pay, so there is no question of missing the instalment,” she says. The returns from the PF and PPF are lower than the 9-9.5% that bank deposits offer, but the interest earned on fixed and recurring deposits is taxable, so the post-tax returns are much lower at 6.5-8%, depending on your tax slab.

If you are not covered by the EPF, you can open a PPF account, which has an annual investment limit of Rs 1 lakh. If you need to put away more than this, you could consider the New Pension Scheme (NPS). The government-backed scheme works just like a mutual fund except that you cannot easily withdraw before 60 and must compulsorily use 40% of the corpus to buy an annuity for regular income. The NPS is a better option because it allows the investor to define his asset allocation and gives him a a dash of equities for higher returns.

Some experts might argue that the returns from these debt options will never be able to beat inflation, and if the same amount is invested in equities, the returns would be much higher. Indeed, if you put Rs 10,000 a month in the VPF, your corpus would grow to Rs 18.94 lakh in 10 years. If you put the same in an equity fund that gives 15% annualised returns, it would be significantly higher at Rs 27.86 lakh. However, unlike the PF, the returns of .. an equity fund are not assured but linked to the performance of the stock markets.

Besides, you can’t expect a fund to consistently deliver high returns over the longer term. Over time, even a good fund tends to slip, which means investors will have to keep rejigging their portfolios if they want to invest in the best schemes. Even then, it is impossible to predict how a certain fund will perform in the future. Reliance Vision was among the top-rated diversified funds 8-10 years ago. Today, it is a laggard that has underperformed its benchmark in the past 1, 3 and 5 years.

CUT DOWN ON RISK

When your finances are in a precarious situation, you have to reduce the risk and be content with lower returns. You can’t afford to gamble in order to make up for lost time. Retirement planning is not like a 20-over cricket match, where batsmen must play risky shots if the required run rate is very high. Experts say you should not rely on factors you can’t control. “Interest rates and the stock market’s performance are beyond your control, so don’t lean on them too much. You can control only two things— how much you save and spend—so focus on that,” says Sudipto Roy, business head of Principal Retirement Advisors.

To compensate for the lower returns from a safe option like the VPF, you can increase the quantum of savings. We compared the returns of 5 top-rated equity funds and found that despite the high returns, the value of SIP investments in these funds was lower than that you would get if you simply increased the contribution to the VPF by 10% every year (see table). To be sure, this is not a fair comparison because the VPF investment increased every year while the SIP investment remained static at Rs 10,000 per month. Yet, it shows how you can amass a significant amount without taking on any risk.

Reducing the risk does not mean you shun stocks completely. Equities are a volatile, yet rewarding, asset class, and there should be at least 10-15% allocation to stocks in your retirement portfolio. This allocation should be in good quality, large-cap stocks, not risky mid- and smallcaps. For best results, you can opt for a large-cap diversified fund or go for the low-cost NPS.

CUT DOWN WASTEFUL EXPENSES

Increasing the quantum of savings is not easy if you don’t have an investible surplus. This is where you need to bring in certain lifestyle changes and cut down on wasteful expenses. We don’t mean small savings that come from giving up dining out or putting your electronic gadgets on standby mode to save electricity. Instead, you need to think several times before you upgrade to a new car or buy that sleek smartphone launched last week. Investment guru Warren Buffett, who has a net worth of $40 billion, but leads a life of relative frugality, says that if you buy things you don’t need, you may soon have to sell the things you need (see box).

If you are a spendthrift, here’s a tip: put your credit cards in the locker and use cash when you go to the mall next time. Studies show that when you pay cash, it pinches more than if you were to swipe your card. Though you end up paying the same amount, the very thought of cash going out of your hands reins you in, while the credit card encourages you to spend.

The changes you bring in your lifestyle now might be a tad difficult, but believe us, they will be far less painful than the ones that might be required to in 10-20 years if you don’t do this now. Dropping your wife at the library before you head for the club on a Sunday morning may seem like a dream retirement. However, it can be a nightmare if your wife has been forced to take up part-time job at the library while you work as a temporary accountant at the club to make ends meet.

REVIEW YOUR RETIREMENT PLAN

You may have planned for a certain income level during retirement, but if your savings are not enough, you must scale down your expectations. Delhi-based finance professional Sanjay Goel and his schoolteacher wife Madhu had planned to save Rs 3 crore for their retirement. However, Sanjay has lost his earlier contributions to the PF due to bungling by his former employer. So, the Goels have had to rejig their retirement plan. “We will have to make do with a lower retirement corpus and scale down some of our plans,” says Sanjay. The couple is now looking at saving Rs 2 crore over the next 11 years.

If your retirement goal is still too daunting, you might have to postpone your retirement by a few years. This can make a significant difference because the longer you work, the more you are able to save. Besides, the period of withdrawals shortens, so the required corpus is smaller.

Extending retirement is not always possible and much will depend on whether there is demand for your skills and the condition of your health when the time comes. To ensure gainful employment after retirement, keep in touch with the latest developments in your industry and develop a network of people who matter. Above all, maintain good health so that you can shoulder the burden of work as a senior citizen.

CONSIDER REVERSE MORTGAGE

One of the most common reasons people are not able to save in the early years is that they put all their life’s savings into property. The net result is asset-rich, but cash-poor, people. They might be living in houses worth crores of rupees, but their standard of living is quite modest in comparison. Reverse mortgage helps unlock the value of the property.

It is just the opposite of a home loan. In a loan, a person buys property with money given by the bank and repays it with EMIs. In reverse mortgage, the bank starts giving the owner a monthly payment as a loan against his house. His heirs have to repay the reverse mortgage loan taken by him against the property.

The best part is that the money received from the bank is actually a loan and is, therefore, tax-free. The government has recently made reverse mortgage annuities from insurance firms tax-free as well. “Reverse mortgage is the most tax-efficient way of earning a pension,” says Sudhir Kaushik, co-founder and CFO of tax filing portal, Taxspanner.

Though the concept is very common in developed markets, it has not picked up in a country where real estate also has an emotional value. People love their homes so much that they cannot bear the thought of selling the property. However, it’s an option worth considering if you enter your sunset years with an insufficient corpus.

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