Unlike other financial goals, Retirement Planning is a peculiar one. Unless you are lucky to have an inflation-protected pension from the government, you are really on your own. You need to save for your retirement, properly.
And you have just one shot at it. If you get it wrong, then the realization of being wrong will generally occur so late that it would be difficult to get your retirement savings back on track. It’s like running a marathon, where if you decide to get serious only in the last few kilometers, you won’t win or be able to change the outcome of the race by running very fast very late.
So you need to start early and invest in the right retirement savings products.
Of course, the products suitable for saving before retirement may or may not be suitable for the post-retirement period, as money planning differs for the timeframes before and after retirement.
That said, let’s have a look at products suitable for retirement savings:
EPF (Employee’s Provident Fund): It is one of the most popular retirement saving instruments amongst the salaried class in India. And this is as good a debt product that you can ever have when saving for retirement in a tax-free manner. In addition to your contributions, the employer too puts in money. The interest earned is tax-free and, most importantly, the EPF corpus at retirement is also tax-free. This works best if you don’t withdraw money while changing jobs and avoid dipping into this retirement savings for other goals.
Voluntary Provident Fund (VPF): There are certain organization-specific limits to how much an employee (and employer) contribute towards EPF. But if you are a risk-averse retirement saver, you can increase EPF savings by additionally opting for VPF. VPF is a voluntary contribution (and hence not matched by the employer) and increases your contributions in EPF.
Public Provident Fund (PPF): If you aren’t salaried or don’t have an option to save via EPF (and VPF), then PPF can be a good option. The returns are slightly less than EPF and there is an upper limit on how much you can invest every year (Rs 1.5 lakh). But still, it is a good option on the debt side for the retirement portfolio.
Equity Mutual Funds: The above products are debt instruments. But when it comes to goals such as retirement that are several years away, it is advisable to have a reasonable component of equity in the savings portfolio. And for most people, investing in equity is best done via regular SIPs in equity funds. Equity funds can deliver inflation-beating returns in the long run. But they are volatile (as is the nature of equity) and hence, should be invested for long. Ideally, the funds should be reviewed every year. If need be, you must switch to better funds. That said, regular rebalancing is also advised.
NPS(National Pension System): The NPS is a retirement-dedicated savings product. Many organizations have this option instead of the EPF. Since this single product allows savers to take exposure to both equity and debt and also control asset allocation, it makes NPS a good option for retirement saving. If you are not comfortable choosing proper asset allocation (mix of equity and debt), then you can go for NPS Auto choice. But unlike EPF and PPF, where the accumulated corpus at maturity is tax-free and allows unrestricted usage, the NPS requires mandatory purchase of annuity worth a minimum of 40 per cent of accumulated corpus. And the pension from this annuity is taxable. The remaining 60 per cent is tax-free and available as one-time lump-sum payment. Mandatorily having to take an annuity makes NPS suitable for only a section of the retirement savers. Many who don’t want to be bound by any restrictions (including those targeting early retirement) are better-served by a simple combination of EPF, VPF and/or PPF and Equity Funds.
Different people have different retirement planning needs. So it’s possible that for a few others, some other products might also work. For example: If one is investing a comparatively larger amount for retirement and EPF deductions are capped ( and VPF unavailable) and PPF limit is exhausted, then debt funds and tax-free bonds can also be considered.
When saving for retirement, it’s important to have proper asset allocation and diversify across products (but not diversify too much). And unless you know the exact amount you need to save for retirement and other goals, you will never be sure whether you are on track of retirement or not.(The writer is the founder of StableInvestor.com)