Everyone works hard and relentlessly with a dream of having to let go everything one day and retire peacefully. You achieve your goals, reach new highs every day, battle your competition, shoulder your responsibilities and walk down towards that elusive “retirement” day. What is also unavoidable is the reality that one day your monthly salary will stop. Therefore, one should start actively investing for retirement as soon as the first salary comes. The average earning years of a person is around 30 years. If life expectancy is assumed as 80-90 years, the length of retired life also becomes 20-30 years.
This raises some additional questions, like –
- Have I Is saved enough for my retirement to live peacefully and with dignity.
- How much is really “enough”?
- Have I planned and and stuck to it with commitment?
- Have I been diligent with expenses and savings
- Have I chosen wisely and not bet on luck?
- Have I taken the right steps to make corrective action with savings and investments?
If you want to build a sizeable retirement corpus, you must invest according to your risk appetite and your horizon of investment. Basically, you must start early and review your portfolio regularly but not resort to balancing the same at short intervals.
Having said that, what instruments should be chosen, what cost and what time period to invest, when to assess your investments?
Briefly, we help explore the various safe, lucrative options available in the market today to make your savings work for you.
Benefits of Compounding by saving early on
Compounding works for your benefit exponentially, suppose you invest Rs.100 with a compounding interest of 10% per annum, your savings would double up in 7.2 years by the rule of 72. If you equate the same to a larger amount of Rs.10 lakhs in approximately 7 years, it would grow to 20 lakhs. Remember you will be consistently saving up too, topping up existing funds, hence, if you are planning to retire 60 years from the time of the investment, it will approximately snowball to about 6 times from its original value. This is the avalanche effect of compound interest and called the Power of Compounding. Compounding interest is like wine, yields better results when money is saved over longer durations. Thus, if you start early, your savings and investment would double, triple and quadruple even before you realize the same by this avalanche effect of the Power of Compounding.
Invest wisely, don’t just save
Inflation eats it up if your money does not grow significantly to beat Inflation. Thus, if you have money at home or in your bank account or even Fixed Deposit for that matter, Inflation along with Time Value of Money is eating the same and reducing the value of your Money. Hence you need to invest it in the market, according to your risk appetite, i.e. how much risk you can afford to take and the time horizon. Always remember that the risk of investment reduces over time as it gets spread out.
Review, re-evaluate, redesign
Let not your investment become sitting ducks! Every 3/6 months review your portfolio, the returns, market value. If they have stopped yielding value or is eroding the value of your investment, its best to seek professional advice on whether this should be dropped and replaced by another instrument.
Time tested investments for your safe retirement
1. PPF –
PPF is a long-term debt scheme of government, in which any individual can invest. The scheme offers regular interest and tax-free return, which is usually higher than those offered by bank FDs.
Risk factor: The protection of capital and accumulated interest on PPF is guaranteed by the government and thus completely safe. However, PPF carries interest rate risk.
Taxation: It comes under exempt-exempt-exempt (EEE) category, that means the investment is tax-exempt u/s 80C and the interest and maturity proceeds are also tax-free.
Return: The average return on PPF from March 1993 to March 2014 was 9.13 – 10 per cent.
If you are salaried, when you sign up for the NPS, your employer contributes 10% of your basic salary* (including Dearness Allowance – DA, if any) towards your National Pension Scheme account. This is done by re-structuring your income. Such an amount contributed by your employer is NOT INCLUDED in your income for tax computation, so NO INCOME TAX IS PAYABLE by you on that amount! Depending on whether you are in 10%, 20% or 30% income tax slab, you straight away save that income tax.
That’s not all. The best part is that there is NO MAXIMUM LIMIT for such a deduction. So higher your income, higher the deduction, higher the savings.
And there’s more to know. This benefit is IN ADDITION TO Sec 80C BENEFIT of up to R. 1.50 lakhs per year! You will also realize that it is proportional to your Basic salary – higher it is, more is your saving. If your Basic Salary is Rs. 5 lakhs p.a., the total savings will be Rs. 69 lakhs, and if your Basic Salary is Rs. 8 lakhs p.a., the total savings is Rs. 1.10 crores!
Example of long term savings with PPF and without:
Mutual funds are managed by asset management companies (AMCs), which channelize people’s money into collective investments in equity, debt and other financial products managed by investment experts. Mutual funds may be broadly categorised into equity funds and debt funds.
Risk factor: Mutual fund investments are subject to market risks. Debt funds are, however, much less risky than equity funds but also give lower returns. Though, non-systemic or company-specific risks are minimised through well-diversified portfolios of equity funds, they still face market-specific risks.
Taxation: Long-term capital gains (when withdrawal is made after one year from the date of investment) on equity funds are tax-free. If withdrawal is made before one year from the date of investment, 15 per cent short-term capital gain tax on equity funds will be charged. Debt fund investors enjoy indexation benefit after three years from the date of investment and are charged 20 per cent long-term capital gain tax if there is any gain over the rate of inflation (i.e. post indexation). The gain on debt fund is added to the annual income of the investor if withdrawal is made before expiry of three years from the date of investments. The equity-linked savings schemes (ELSS), which have 3-year lock-in period, come under EEE category like PPF.
Return: Equities have out-performed other investment asset classes over the long-term in India as well as globally. 10-year average returns of large cap funds, ELSS and hybrid funds is around 10-11 per cent each year. Midcap and small cap funds have done slightly better and sectoral bets (FMCG, pharma, banking etc) have got between 14-18 per cent average gain. While these gains are higher than PPF, they were much more volatile. The CAGR on liquid and short-term debt funds are comparable to that of PPF and volatility is also in sync with the PPF rate.
National Pension System is a voluntary, defined contribution retirement savings scheme designed to enable the subscribers to systematically save during their working life. NPS is regulated by PFRDA, with transparent investment norms, regular monitoring and performance review of fund managers by NPS Trust. The NPS offers two approaches to invest subscriber’s money.
First, active choice where the individual would decide on the asset classes in which the contributed funds are to be invested and their percentages (asset class E (maximum of 50 per cent), asset class C, and asset class G).
Secondly, auto choice — lifecycle fund — this is the default option under NPS wherein the management of investment of funds is done automatically based on the age profile of the subscriber. NPS is the cheapest product available in terms of charges.
Risk factor: Like mutual funds, fund performance depends on fund manager and the asset class choice.
Taxation: This product is EET (exempt-exempt-taxable). The government has given an attractive sop through additional deduction of Rs 50,000 over and above 80C limit of Income Tax Act. Although you now get extra tax deduction for what you invest in NPS, the maturity proceeds are still taxable.
Return: Since inception, pension fund managers (with 3-year track record) have given between 8.4-11.16% annualised returns for asset class E. The same for asset class C is 9.25-11.09% and asset class G is 7.88-9.61%. These are for Tier I accounts.
Insurance plans, if taken early, can be used as a tool for wealth creation besides offering protection.
Risk factor: Investments in insurances are not only risk free, but it is a mechanism in which individuals can transfer their risk to insurance companies, for a cost. Like PPF, in case of policies taken from LIC, the sum insured (SI) and the accumulated bonus enjoy guarantee from the government. However, apart from LIC, other life insurers don’t enjoy such guarantee from the government.
Taxation: Like PPF, insurance also falls under EEE category.
Return: Under endowment insurance plans, apart from death, SI and bonus are paid back on maturity. As life risk is covered, the premium amount increases with entry age of the life insured and the rate of return diminishes, so insurance is not treated as very good investment vehicle. However, if a person takes insurance at an young age and for entire working life, it may give good return at the time of retirement.
In short , this reference table can help you get a glimpse of all options –
Whatsoever your financial position is at present, you should be able to live financially independent when you retire. Therefore, planning your retirement from financial point of view is crucial and an integral part of financial planning.
Dilzer Consultants Pvt Ltd