With the dismantling of the joint family system, rapid urbanization, the concept of nuclear families and children opting to stay separately, people have started recognizing of the need to prepare for their retirement kitty while they are still working and earning. Unfortunately, majority of people start thinking about their retirement planning only when they cross 40, by that stage they have been lost out of a plenty of time for their investment. In India, about half of those who save and invest agree that starting is the key to retirement. But they don’t know where to invest, they have been wasting a time to seek pension and other debt-oriented products which are totally flawed and tax inefficient, especially we are in a low interest rate regime. After retirement, many people would have to maintain same lifestyle with all luxuries that they are currently enjoying, which requires a big corpus of money as part of retirement benefits.  In retirement years, there should be a regular flow of income which could meet your regular expenses that will arise each month. If you retire at 60 and die at 65, you do not need to worry about cash flows for the future. But if you live to 80 and 90 and you are staying alone in house, where are your cash flows going to come from?

So, the biggest question mark about retirement is not the prospect of old age but how long you are going to live after retirement. If you want to live with lower corpus that has been accumulated, the higher will be ability to put current life style at your own risk. Therefore, a right frame of retirement kitty is to generate required the regular income flow over period of time and remain consistently to beat inflation without compromising the quality of life. Those who have the luxury of choosing where they want to invest, the theme of this post will address to all those people.


Mandatory Savings: EPF and NPS

A large percentile of the population have been working in the organized sector with regular employment whether with government organizations or privately owned companies, their retirement benefits accrue automatically in the form of provident funds and gratuity schemes, though these benefits are often not sufficient to last through the retirement years. However, it is a good thing for a salaried individual that somebody is planning for you and there is some corpus of funds available after retirement. Government employees today have to compulsorily contribute their statuary savings to National Pension System (NPS). That said, while government employees have no choice but to accept this but private sector employees have the option to consider EPF or NPS and self-employed has the option to consider other, perhaps better and more lucrative options.

Let’s a quick recap of the EPF and NPS as it exists today. Also Read : NPS is still Tax Inefficient and flawed product!

NPS is a pension scheme for Indian citizen in the 18 to 60 age group. It is mandatory for central and state government employees to subscribe to this scheme while it is optional for others. NPS is currently under EET (exempt, exempt, tax) regime which means it is tax-free on contribution and at accumulation stage but its withdrawal of the corpus including your contribution is added to the income for that year and is thus taxable on maturity.  At the maturity, the subscriber has the option to withdraw an amount within the maximum allowed limit of 60% of the corpus and get annuity with balance corpus. Further, annuity is treated like income and is therefore taxable income. Needless to state that NPS has got the status of double whammy of taxation. EPF is certainly more flexible and tax efficient than NPS on withdrawal. It enjoys tax benefit on withdrawal and falls under the category of EEE (exempt, exempt, exempt) that is fully tax free.

EPF (Employees’ Provident Fund) is a guaranteed return, currently earns interest at the rate of 8.80% a year where as NPS invests in market-linked products. Both the EPF and NPS aim to secure the post-retirement life of the employee. Though NPS scores higher in terms of return and allows you to get an additional Rs 50,000 as a separate deduction under section 80CCD, it is still work-in-progress and there are several hurdles that need to be sort out. It would not be wise to invest into NPS until such time that the NPS gets stabilize and becomes matured product. Also Read : Is recent hike in EPF limit enough for retirement?

Where to invest?

Since there is a basic mindset issue in our Indian people, that of safe guaranteed returns. This is the reason people have invested a lot in fixed deposits and other interest bearing instrument which gives them 7 and 8% returns. But that is the worst thing to do and this where they lose out on the opportunity to create wealth. While investing too much in debt-oriented assets, the income you get will get eroded by inflation and run out of money soon enough. A little bit of debt is fine, but not too much. Before choosing any asset, it is essential for the investor to decide on a target asset allocation and to carefully consider investing options. It is observed that average life expectancy is 85 years. So if a person retires at age 60, then he has a life span of 25 or more years during retirement. In that case, the ideal asset allocation should be 15% in debt funds and 85% in equity funds. This approach provides growth, protection from inflation and enables the person to have enough corpus to meet the requirement of his retirement kitty. If you want to invest in property to hedge you bets, you would have taken a loans at about 10 to 12% interest to buy property. What is the point of investing in property for your future and getting returns of 8 to 10% which is also not tax efficient? Note that the gains from property considered long-term after 36 months and are taxed at 20% with indexation, while short term capital gains are taxed at individual slab rates. If you want to invest in Gold and gold is not investment per se, it will not help you. So what is left ultimately is equity, there is no way out.

Get Exposure of Equity

Generally people are really not worried about equities but are worried about volatility in the equity markets. They see the market going up and down, they hear people in the media talking about indices crashing, bear market, bull market and they don’t comprehend it. Equity is meant for those people who can afford to put money away at least ten to fifteen years and not worry in the interim period about what has happened to it as this is money that they do not need to use during that time. By the time you are in your thirties or may be in 40+, there could be anywhere between 20 to 30 years of away from retired life and this is a long time. If there is an opportunity, then use of equities becomes necessary as this will ensure that time is used effectively. So getting equity exposure in your portfolio can prove to be a boon for your retirement kitty. Also Read : Retirement Planning: A Real Case Scenario Review

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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