Babar Zaidi | TNN | Jun 13, 2016, 06.53 AM IST | Times of India
NEW DELHI: The first time Arjun Amlani used an online calculator to assess his retirement needs, he was shocked. The Mumbai-based finance professional, whose gross income was around Rs 10 lakh a year then, needed more than Rs 8 crore to fund his retirement needs. “The eight-digit number was too scary,” he says.
Figures thrown up by excel sheets and online retirement calculators can be intimidating. Here’s an example: if your current monthly expenses are Rs 60,000, even a conservative inflation rate of 7% will push up that requirement to over Rs 4.6 lakh in 30 years. To sustain those expenses for 20 years in retirement, you need a corpus of Rs 9 crore. To some investors, such enormous figures seem so unattainable that they just stop bothering about retirement. That’s a mistake.Retirement cannot be wished away. The paycheques will stop coming, and your living expenses won’t end but keep rising due to inflation. Worse, critical expenses like healthcare will be growing faster than overall inflation. The sooner you start saving for that phase of life, the more comfortable retirement will be.
The big question is: how can one build a nine-figure nest egg when the monthly surplus is Rs 15,000-20,000? Mutual fund sellers claim that an SIP of Rs 15,000 can grow to Rs 10 crore in 30 years. But this calculation assumes compounded annual returns of 15% for the next 30 years.It’s not advisable to base your retirement plan on such over-optimistic assumptions. Life insurance agents will offer plans that will give you an assured sum on retirement. But the returns they will generate are too low and the amount required will be too high. An endowment policy that gives Rs 10 crore after 30 years will have an annual premium of roughly Rs 12 lakh — or Rs 1 lakh per month.
Increasing the investment
When Amlani used the calculator, his monthly income was around Rs 85,000 and he needed to invest almost 20% of this for his retirement. A year later, his income has gone up and so have expectations. The calculator now says he needs to save over Rs 10 crore in the next 27 years, but Amlani is not worried. If he continues putting money in his PF, PPF and equity funds as planned, it won’t be difficult for him to reach the target.
All Amlani has to do is increase the quantum of investment every year. If a 30-year-old with a monthly salary of Rs 50,000 starts saving 10% (Rs 5,000) for his retirement every month in an option that earns 9% per year, he will accumulate Rs 92 lakh by the time he is 60. But if he raises his investment by 10% every year (in line with assumed increase in income), he would have saved Rs 2.76 crore.
It’s surprising that not many investors follow this simple strategy even though their income rises every year.Sure, the annual increment in salary is nullified to some extent by the increase in cost of living. Yet, even when there is a marked increase in investible surplus, people don’t match investments with the increase in income. The silver lining is that contributions to the Provident Fund are linked to income and automatically increase after every annual increment.
The right investment mix
We looked at three types of investors: risk-averse individuals who stay away from equities, moderate investors who have some exposure to stocks and aggressive investors who are willing to take risks. Each starts with a monthly investment of Rs 15,000 spread across different retirement saving options, and increases the investment amount by 10% every year. Unfortunately for the risk-averse investor, his nest egg is considerably smaller than those of the moderate and aggressive investors.
This is because apart from PF and investments in small savings schemes, he has invested in low-yield life insurance policies and pension plans. Life insurance policies offer assured returns and a tax-free corpus. But the returns are very low–even a long-term plan of 25-30 years will not be able to generate more than 6-7%. Pension plans from life insurance companies are also high-cost instruments. While this shows that equity investments are critical for a long-term goal, the other two haven’t taken too much risk either.
The equity exposure of the moderate investor does not exceed 53% while the aggressive investor has a marginally higher allocation to stocks. The moderate investor comes close to the Rs 10-crore mark, while the aggressive investor manages to reach the nine digit figure.
Investing discipline needed
The big problem, however, is the lack of investing discipline. Though our calculations do not allocate too much to equity, we have assumed regular investments for 30 years. In reality, data from AMFI shows small investors withdraw 47% of investments in equity funds and 54% of investments in non-equity funds within two years. In fact, 27% of equity fund investments are withdrawn within a year. “Small investors just don’t have the patience or the long-term vision required to make money from equity investments,” says a senior fund manager. It’s futile to imagine a nest egg of Rs 10 crore if your investment term is only 1-2 years.
The trajectory of equity investments is never a straight line. It will have ups and down, which is an inherent feature of this asset class. However, in the long-term, these investments will prove more rewarding than fixed income options. Although equity funds have churned out much higher returns in the past 15 years, we have assumed a conservative 12% returns from equity investments.
Source : http://goo.gl/qYLTb0
The PF can be an important pillar in a retirement plan, but one needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.
Preeti Kulkarni, TNN | Nov 24, 2014, 07.10AM IST | Times of India
If you dream about a comfortable retirement but are planning to depend solely on your Provident Fund (PF) to meet your needs, be ready for a shock. The PF can be an important pillar in a retirement plan, but the corpus of the average subscriber is likely to fall woefully short of his requirement.One needs to make additional investments to build a corpus big enough to sustain one’s expenses for 20-odd years after retiring.
To be fair, the Provident Fund’s design makes it the most effective way to save for retirement. You start contributing from the very month you start earning, and since it is a compulsory saving, you can’t avoid it. Besides, your contribution is linked to your income and rises with every increment in your salary. If a person takes up a job at the age of 25, even a modest contribution of Rs 5,000 a month and a matching contribution by his employer can build up a massive corpus of Rs 6.89 crore over 35 years. This calculation assumes that his income (and, therefore, the contribution) will rise by 8% every year and the PF will give 8.5% returns.
While the figure of Rs 6.89 crore may appear huge, it may not be enough. If you need Rs 50,000 a month for living expenses today, a 7% inflation would push up the requirement to roughly Rs 5.34 lakh a month in 35 years. When you are 60, you would need a corpus of Rs.10.52 crore to sustain inflation-adjusted withdrawals for the next 20 years. Assuming a post-tax return of 8.5% and 7% inflation, the Rs 6.89 crore from the PF would be completely wiped out in a little over 12 years. This could mean having no money in your retirement account at the age of 72.
There’s another problem. To make your PF work for you, you must remain invested for the long term. However, a lot of people withdraw their PF when they change jobs, thus losing out on the power of compounding. “In India, the PF is often used for other purposes, particularly when people change jobs. They end up withdrawing this accumulated corpus to buy expensive gadgets or go on a holiday, forgetting that the purpose was retirement planning,” says Arvind Usretay, India Retirement Business Leader, Mercer. A recent global survey by Mercer has ranked India’s retirement system the lowest among the 25 countries surveyed.”What continues to hold India back is the lack of retirement coverage for the informal sector and less than adequate retirement income expected to be generated from contributions made to the Employees’ Provident Fund (EPF) and gratuity benefits,” notes the Mercer study.
Another global study by Towers Watson points out that a significant majority of employees sees their employer retirement plans as the most important source of income in retirement. “Employers must educate their employees on the need for retirement planning and provide them the tools to help them save adequately,” says Anuradha Sriram, director, benefits, Towers Watson, India.
To ensure a comfortable life in retirement, one needs to make additional investments to build a corpus big enough to sustain one’s expenses for nearly 20 years in retirement. Here are a few options you can consider.
Mutual funds are, perhaps, the best way to supplement your retirement savings.Among these, equity mutual funds have the potential to give very high returns, but also carry high risk. They are best suited to younger investors who can withstand short-term volatility to earn long-term gains. “Equity funds should be the instrument of choice for young investors who have 25-30 years to build a retirement kitty,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories. An additional advantage of investing in equity funds is that the gains are tax-free.
If you are averse to taking risks, consider a balanced fund, where the eq uity exposure is lower. Ultra cautious investors can go for MIPs of mutual funds that invest only 15-20% of their corpus in stocks and put the rest in bonds. However, the returns of MIPs will not be able to match those of equity and balanced funds.
Ulips have earned a bad name because of the rampant mis-selling in the past.However, this much reviled product can be a good option for retirement planning.In recent months, insurance companies have come out with online plans that levy very low charges. The Click2Protect plan from HDFC Life charges an annual fund management fee of 1.35%, which is less than the direct mutual fund charges. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual investment is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn’t have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don’t have lower charges but compensate long-term investors with ‘loyalty additions’. The best part in a Ulip is that one can shift money from debt to equity, and vice versa, without incurring any tax liability. The corpus is also taxfree on maturity.
Unit-linked pension plans
Unlike Ulips, unit-linked pension plans are not a very good option. Although they work like Ulips during the investment years, the rules at the time of maturity are different. You can withdraw only 33% of the corpus on maturity and the balance must compulsorily be used to buy an annuity . The pension from the annuity is fully taxable as income, so these plans are not tax-efficient. Besides, they have very high charges in the initial years, which eat into the returns of the investor.There is no online unit-linked pension plan on offer.
The New Pension Scheme offers greater flexibility to investors than the unit-linked pension plans from insurance companies. The charges are also very low. The investor can choose from six pension fund managers. He can also switch to another fund manager once in a year. The best part about the NPS is the lifestage fund. Under this, the asset allocation is linked to the age of the investor. The exposure to a volatile class like equity is progressively brought down as the person gets older. “It is a well-planned pension product and facilitates automatic lifecycle-based investment option, making it attractive even for those who may not be financially savvy ,” says Usretay. The drawback of this scheme is that the equity exposure is capped at 50%, and 40% of the corpus must mandatorily be put into an annuity to earn a pension. As mentioned earlier, the pension income is fully taxable.
Traditional insurance policies
They offer tax-free income and insurance cover, but traditional insurance policies are not the best way to save for retirement.The returns are quite low at 6-7%, and the investor has very little flexibility . The PPF, which offers the same tax benefits, may seem like a better alternative. If the annual ceiling of Rs 1.5 lakh in the PPF is a problem, you can contribute more to your PF through the Voluntary Provident Fund.
Apart from making additional investments for retirement, you need to plan for emergencies as well. An unexpected event can derail your financial planning.”Build a contingency fund for financial emergencies and buy adequate life and health insurance,” says Sudipto Roy, managing director, Principal Retirement Advisors. The contingency fund should be big enough to take care of six months’ expenses.
Source : http://goo.gl/pClWsT
Babar Zaidi | Sep 15, 2014, 06.27AM IST | Times of India
A recent survey by global professional services firm Towers Watson says that saving for retirement is a big concern for Indian employees, with 71% of the respondents worried that they are not saving enough. In another survey conducted by ET Wealth last year, respondents listed volatility of returns (32%), low savings rate (26%) and lack of reliable financial advice (25.4%) as their biggest retirement worry.
That’s surprising, because a majority of the respondents of both surveys were already investing in a product that takes care of all these concerns.The Employees’ Provident Fund (EPF) managed by the Employees’ Provident Fund Organisation (EPFO) ensures that an individual puts away enough for retirement every month. With 12% of his basic salary and a matching contribution by his employer, a subscriber to the EPF should be able to accumulate a decent amount by the time he retires. If someone started working at the age of 25 in April 2000 at a basic salary of `10,000 a month and got a raise of 10% every year, he would roughly have accumulated `16 lakh in his PF account by now. If the trend continues, he would have saved about `1.23 crore by the time he is 55 years old (see graphic) and more than `1.7 crore of tax-free money on retirement at 58.
Despite the tremendous opportunity, most contributors to the EPF won’t reach the `1 crore milestone. More than 13% of the respondents to the ET Wealth survey withdrew their PF balance each time they changed jobs. Withdrawing from the PF can be counter-productive on two counts. One, the withdrawn amount is usually blown away on discretionary expenses and retirement savings are back to square one. Two, if the individual withdraws his PF balance before completing five years, the amount becomes taxable.
Another 20% of the respondents to our survey said they dipped into the PF corpus for other needs.The EPFO allows an individual to withdraw from his PF account for specific needs, such as constructing or buying a house, children’s education and marriage or a medical emergency.
Should EPF invest in stocks?
The other concern about volatility of returns is also not an issue with the PF. The EPF invests in debt instruments that deliver stable returns. EPFO rules allow the EPF to invest up to 15% of its corpus in stocks but the Central Board of Trustees has steadfastly ignored suggestions to this effect.
Many financial experts, including Finance Ministry officials, have castigated the EPFO for this aversion to stocks. They say the EPF is a low-yield debt-based scheme that can never beat inflation.At a recent meeting of the EPFO, it was pointed out that the returns offered by the EPF since 2005, when adjusted to inflation during the period, were in the negative. The `100 put into the EPF in 2005, when marked to inflation, were worth only `97 now.Experts argue that the only way the EPF can beat inflation is by investing some portion of its gargantuan corpus in the stock markets. But while the inflow of fresh investments will be good for the equity markets, they may not have the same impact on investor returns. The New Pension System (NPS) funds for central government workers are allowed to invest up to 15% of their corpus in Nifty-based stocks in the same proportion as their weightage in the index. We looked at the SIP returns of these funds in the past 5-6 years and found that they were not significantly higher than what the 100% debt-based EPF has churned out. In fact, two of the funds have actually given lower returns. This despite the fact that these funds have invested right through the bear phase of 2008-9 and the markets are at all time high levels right now. Our calculations are not based on point-to-point returns but on SIP returns. We took into account the NAVs of the first reporting day of each month and then worked out the internal rate of return.
Don’t shun equities altogether
Having said that, we must add that a certain portion of your retirement savings should certainly be allocated to equities. It’s only that this equity exposure need not be through the EPF. Any retirement plan has to be a combination of several investments. Keep the EPF as the debt portion of your retirement plan and invest 5-20% in equities through a diversified fund.
Interestingly, though the pension fund managers of these NPS funds can invest up to 15% of the corpus in equities, they have allocated less than 8% to stocks. “Pension fund managers have been conservative because markets have been volatile.The negative impact of equity is magnified in the short term so they have shied away from maxing the equity exposure to 15%,” says Manoj Nagpal, CEO of Mumbai-based wealth management firm Outlook Asia Capital.
Compulsory and linked
The third concern about the lack of reliable advice is also laid to rest by the EPF. It is compulsory and an individual has no option but to contribute to it.What’s more, it ensures regular savings. According to estimates by HR firms, the average hike this year was 10.5%. How much was your hike? More importantly, did you increase your SIPs by the same proportion? Not many people care to do that. They spend more, buy more, party more but keep investing the same amount.
The EPF is different. Your contribution is linked to your income, so when you get a pay hike, your EPF contribution will go up in the same proportion.If your basic salary is `30,000 a month, you will be contributing `3,600 plus a matching contribution by your employer. If you get a 20% hike and your basic becomes `36,000, your contribution will automatically increase to `4,320. This is a great way to build a corpus in the long-term.
The icing on the cake is that you can invest more than 12% of your basic salary. Millions of Indians welcomed the move when the budget hiked the annual investment limit in the PPF to `1.5 lakh. But Delhi-based PSU manager Naveen Parashar was not one of them. “I can’t understand why salaried taxpayers are so excited about this development.They have always had the option to invest in the Voluntary Provident Fund (VPF) and get the same tax benefits offered by the PPF,” he says nonchalantly. Parashar puts an additional `14,700 into the VPF every month, taking his overall contribution to the EPF to `31,700 a month. This forced saving has helped him build a sizeable corpus in the past 15 years.
Central Provident Fund Commissioner K.K.Jalan echoes Parashar’s views. “The VPF is an ideal saving instrument for high-income earners looking to build a tax-free corpus. Unlike the PPF, there is no limit to how much one can invest,” he says.
The new look EPFO
The EPFO is fast shedding its dowdy image and using technology to turn into a more professional and nimble organisation. It has made several other investor-friendly changes in the past 12 months.Last year, it introduced the online facility for transferring the balance to a new account. This year, it has made it possible to check the account online.Going forward, all members are expected to have a Universal Account Number and this will be portable across employers and cities. In fact, UANs have already been allotted to 4.17 crore active contributors to the EPF. In the first four months of this financial year, the EPFO settled nearly 43 lakh claims. Of these, more than 68% were settled in less than 10 days.
Source : http://goo.gl/ag49rJ
Integra’s Take: If you are salaried, use Voluntary Provident Fund (VPF) smartly as there is no annual limit unlike PPF. Never withdraw your EPF balance, always chose to transfer on changing your job.