How to Win at Retirement Savings

In India, most individuals are responsible for their own retirement savings. Unlike western countries, India lacks basic social security and medicare that would take care of the individual in retirement.  School and colleges usually don’t teach anything about retirement planning and most of us are left on our own. That’s where we come in. Here is what you need to know about saving for life after you stop working and getting on the path toward a comfortable retirement, no matter your career or the size of your paycheck.

In this article we will cover the following topics:

Starting Early

The best day to start saving is today, even if you can save only a little bit

The most important advice about saving for retirement is this: Start now. Why? Two reasons:

First  – The magic of compound interest. You’ve probably read about this before, but the best way to understand it is to see it in front of you.

Yes, we did that math correctly. If two people put the same amount of money away each year (50,000), earn the same return on their investments (7 percent annually) and stop saving for retirement at the same age (67), one will end up with nearly twice as much money just by starting at 22 instead of 32.  Put another way: The investor who started saving 10 years earlier would have about 500,000 more at retirement. It’s that simple.

Second – Saving is a habit. It may make rational, mathematical sense to start saving early, but it isn’t always easy. But the instinct to save grows as you do it. It’ll start to feel good as you see that account balance grow.


BIG QUESTION – HOW MUCH SHOULD YOU SAVE?

The short answer: As much as you reasonably can. Sure, you’ll see articles telling you to save at least 15 percent of your income, etc; that’s a fine benchmark, though the true number will depend on how long you hope to work, what kind of inheritance you may get and a bunch of other factors. So start with something, even if it’s just Rs 500 per month. DO this for a year, then, try to save a little bit more each year. Do it early and often enough so that saving becomes second nature.

Understanding Your Investment Options

Now that you’ve made the right choice in deciding to save for retirement, make sure you are investing that money wisely. From a simple post office savings account to researching and trading stocks yourself–there are a lot of ways to save, invest and grow your money. Here is partial list of investment options

BANKING

  • Savings Bank Account
  • Bank Fixed Deposits
  • Bank Recurring Deposits

POST-OFFICE SCHEMES

  • Post-Office Recurring Deposit
  • Post-Office Time Deposit
  • Post-Office Monthly Income Scheme

SMALL SAVINGS SCHEMES

  • Public Provident Fund (PPF)
  • Sukanya Samriddhi Yojana (SSY)
  • Senior Citizens Savings Scheme
  • National Savings Certificate (NSC)
  • Kisan Vikas Patra (KVP)

INSURANCE

  • Health and Other Related Insurance
  • Life Insurance

PENSION

  • Pension and Annuity
  • NPS & Atal Pension Yojana

OTHER INVESTMENT AVENUES

  • Stocks and Equity
  • Mutual Funds
  • Company Deposits
  • Capital Gains Tax Exemption Bonds or 54 EC Bonds
  • Sovereign Gold Schemes

Each of these options differs from each other in terms of risks, safety, guarantees, key benefits, minimum investments and lock-in details.


Retirement Savings Options

We will keep our focus on retirement options for this guide. Even the lineup of retirement accounts is a giant bowl of alphabet soup: EPF, ELSS, PPF, NPS etc. They came into existence over the decades for specific reasons, designed to help people who couldn’t get all the benefits of the other accounts. But the result is a system that leaves many confused.

Let’s talk about these options in further detail

EPF

Employee’s Provident Fund or EPF is the most popular retirement saving instrument in India. Though it was introduced as a retirement product, not many see it so.

EPF is basically a corpus of funds built through regular, monthly, contributions made by an employee and his/her employer. Employment is necessary. The amount contributed to the fund is based on a fixed rate. Employees earn interest on their EPF balances. At the time of withdrawal – both Interest earned and the original amount contributed is tax-free, making this very tax efficient forms of long-term retirement savings among the working population in India. Besides retirement, the corpus in an employee’s EPF account can also be used at the time of resignation or death. It also offers social security in terms of financial security at times of emergency or if an employee is rendered unfit for unemployment.

Fixed Rate of Return: Rate of return from EPF is currently around 8.5% p.a. Interest rates are declared each year by EPFO.

Tax Benefit: Contribution to EPF offers deduction up to 1.5 lakh limit under section 80C; Interest from EPF is tax-free and withdrawal is also tax-free if there is continuous service of 5 years.

Portability: Employees can now transfer their accounts when they change employers and they can access their EPF accounts through a single-point with the introduction of the Universal Account Number (UAN).

It is advisable to stay invested in this scheme by opting for EPF transfer whenever there is a change of job. This would ensure that you reap the benefits of guaranteed returns along with the power of compounding.

Also, you might be interested in this – Check PF Balance via Missed Call


PPF

Public Provident Fund is also very popular investment choices for Indian investors. There are many reasons that make PPF such a popular choice. Like it is very easy to open a PPF account: You can open a PPF account with just Rs 100 in any branch of SBI or other PSU banks. You can also open PPF account in Post Office. It can also be opened for a minor child as well (with parents as guardians).

Flexibility of investment: The min. investment amount is Rs 500 and the max. amount is Rs 150,000. You can also pay in 12 or fewer installments during the financial year. Failure to pay the minimum amount will result in your account being suspended, but your balance will continue to earn interest. You can unsuspend your account by paying a small penalty along with the investment arrears.

Fixed Rate of Return: Interest rates are declared by government periodically, usually annually. Interest earned is compounded yearly. The current rate of interest on a PPF account is fixed at 8.1% p.a.

Tax Benefit: EPF offers deduction up to 1.5 lakh limit under section 80C; Interest from EPF is tax-free and withdrawal is also tax-free if there is continuous service of 5 years.

Risk-Free: Like EPF — PPF is also risk-free as PPF is backed by the government.

Lock-in Period: 15 years. You can only make a complete withdrawal of principal and interest after 15 years. Partial premature withdrawals can be made every year from year 7 but are subject to conditions. You can also continue that account beyond maturity for 5 years at every renewal, with or without making additional deposits.


NPS (New Pension Scheme)

 

NPS is another retirement product open to all individuals across the country. NPS has delivered annualized returns of around 10% for last several years. This scheme is mandatory for government employees. The fact that fund managers of NPS scheme can also take exposure to equity and equity related instruments is also a positive for the scheme in the long run.

NPS also provides tax benefit in the form of deduction under section 80C. Remember that it is mandatory to purchase an annuity worth 40% of the corpus accumulated through NPS at the time of retirement. You can use these Pension Calculators from Govt. of India to calculate the basic pension, family pension and pension commuted.

PFRDA controls the NPS, and there is strict adherence to standards. Evaluation of the performances of fund managers is also undertaken by PFRDA on the frequent basis.

Citizens (including NRIs) between the age group of 18 years to 55 years are eligible for enrollment in the NPS scheme. While NPS is compulsory for government employees, it’s purely voluntary for others. NPS assures a fixed income for a definite period after retirement. PFRDA has appointed 7 fund managers to handle investment portfolios, and they are as follows:

  • HDFC Pension Management Company Limited
  • ICICI Pension Fund Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • LIC Pension Fund Limited
  • Reliance Capital Pension Fund Limited
  • SBI Pension Funds Private Limited
  • UTI Retirement Solutions Limited

You will need Unique Permanent Retirement Account Numbers or PRAN to apply for NPS scheme. Each subscriber of NPS is allocated two accounts Tier I and Tier II, which they can access at any time.

Rate of Return: NPS invests subscriber’s money into a broad range of investment options, the NPS does not offer fixed interest rate. NPS schemes can earn a subscriber anywhere between 12% – 14% interest, which is still on the higher side when taking other investment options into consideration.

Tax Benefits: NPS offers tax benefits up to Rs.1.5 lakhs under section 80CCD (1) of the Income Tax Act and additional Rs.50,000 under section 80CCD(1B) on contributions made to Tier 1 account every year.

Lock-in Period: Withdrawals are not allowed from Tier I account. It is solely meant for savings after the subscriber’s retirement.

Withdrawal: A minimum of 40% of the total accumulated amount is used for the purchase of annuities, and the remaining balance is given to the subscriber in lump sum payment. The main reason for 40% investment in annuities is to ensure employees will still obtain a regular and stable income every month following their retirement.

to be continued….