How much should I keep aside for my child’s future studies? How much to save for the next holiday? Should I change their school to a better one and how much more will it cost? If you are a parent these are probably the predominant saving and investment thoughts plaguing your mind right now. But have you taken any steps? If you are depending on few small investments for retirement; then you might want to re-consider your future plans for the sake of a secure and safe retirement.
Keeping in mind inflation it is highly unlikely that 2-3 minor savings will be able to properly fund your retirement. There are various myths associated to savings and retirement and with the frequency with which these myths get repeated; along with an inherent human nature of delaying an attempt towards saving; most of us have started mistaking these myths for the truth. It is important to distinguish fact from fiction and get rid of these misplaced beliefs.
Here are few myths about retirement that might be giving you a mistaken sense of security about the future.
Myth #1: My EPF/PPF will take care of my nest egg
Reality-A portion of your salary gets deducted towards The Employee Provident Fund (EPF) and once you retire you will get a lump sum which you feel will comfortably tide you through your retirement. But the fact is that this amount alone will not be enough for retirement, as it is not aligned with the inflation and rate of lifestyle changes.
When you start working, you and your employer both contribute 12% of your basic salary (plus dearness allowances, if any) into your EPF account. However, contribution by employer is bifurcated into contribution to Provident Fund and contribution to Employees Pension Scheme (EPS). So 3.67% (out of 12%) from your employer will go to EPF, while the balance 8.33% from your employer’s side is diverted to your EPS.
So for example- if an employee’s gross salary is INR 50,000 pm and Basic Salary is INR 20,000
- If Mr. X’s basic salary is Rs. 20,000, and receives a 5% increment in salary every year.
- He has worked for 35 years (starting at age 20, up to age 60)
- He has contributed 12% of his basic salary, which has been matched by his employer as 3.67% to EPF and 8.33% to EPS.
- His total contribution in 35 working years will be Rs. 26.01 lakh and the company’s contribution will be Rs. 7.95 lakh, making it a total contribution of Rs. 33.96 lakh.
- This amount will grow to a total of Rs. 1.38 crore at the time of his retirement! (Assuming the rate of interest stays constant at 8.5%).
But this is all assuming someone who works continually for 35 years; has a basic salary of Rs.20,000 to start with and has a steady increment of 5% in basic salary. And even if a person does manage to get to this point the eventual amount Rs. 1.38 crore though substantial will not be enough.
This is because assuming an inflation rate of 8%; if your expenses are Rs 25,000 a month at 25 years they will grow to Rs 3.42 lakh by the time you are 60 (keeping in mind inflation). Considering a life span of 85 years this would not be sufficient for the complete 20-25 years of your retirement. Similarly if you have opted for a public provident fund (PPF) instead of EPF they too do not offer adequate returns once you consider inflation. For instance- if long-term inflation is at 6% and the PPF rate is 8.5%, that’s a mere 2.5% (8.5%-6.0%) net of inflation, and they need to be matched with higher return investments.
For this reason it is critical to invest in other financial products also; including market linked equity funds; such as a retirement specific ULIP (which is equity based and has high potential of returns).
Myth #2: I am too young to start saving for retirement
Reality- You may feel you have just started your career and there is a lot of time left to start savings for retirement. But conversely time and the power of compounding can be your two best friends when saving for retirement. You are never too old to start saving for retirement and the faster you start the lesser amount you would need to put aside every month for retirement.
For instance we shortlisted some funds and as they could be taken online; we could easily try this test on the –retirement plan fund; provided by ICICI prudential
|Mr. X||Mr. Y|
|Retirement saving started when he was 35 years||Retirement saving started when he was 45 years|
|Saving per annum – 60,000||Savings per annum- 60,000|
|Rate of interest – 8% pa.||Rate of interest- 8% pa.|
The results showed that at the age of 65; with the help of this fund-
- X would be eligible for a pension of Rs. 5.42 lakhs pa.; for the rest of his life
- Y would be eligible for a pension of only Rs. 2.22 lakhs pa.; for the rest of his life
Hence to attain the same goal as Mr. X; until retirement Mr. Y would need to put aside nearly Rs. 1.50 lakhs pa.; for the next 20 years (This is more than double the amount Mr. X paid for 30 years). So in reality smaller amounts paid at an earlier age are much less challenging; as you can benefit profoundly from the compounding effect of the money invested earlier.
Myth # 3: I can work for as long as I have to
Reality- Wanting to be active and continue working even after retirement is a great goal; but in reality as we grow older and get more experienced we don’t want to learn new things and it gets difficult to get the kind of job we really want. Additionally with new technologies and ideas invented everyday; companies prefer hiring younger blood that will be willing to learn new things and be open to new ideas. Hence major chunk of jobs are reserved for younger people; as well as the higher paying ones. In addition you may have heard about a lot of early retirements caused due to some sort of illness and as life is unpredictable you cannot be completely sure about how long you will be able to work. So in essence it is wiser not to rely too much on this income while deciding your retirement savings.
Myth # 4: My health care expenses will not increase that much
Reality- Most of us due to globalization have much more demanding jobs today with – higher stress and even a lot of travelling involved. If your job involves pressing deadline, a lot of travel, lots of hours of work, etc. then it is highly likely you are eating a lot of outside food, getting very less sleep, and in short are overworked. All this over a long period of time can take a toll on you and on your health; which will hence not be the same as you grow older. Moreover coupled with old age your health will require much more attention than you need to give it today. So unless we make a very radical change in our lifestyle (though that too is not a guarantee); it is difficult in today’s fast paced world to imagine being stress free and ailment free at a later age. This means that health care expenses are expected to increase significantly as you grow older and this in itself will add up to your monthly expenditure considerably during retirement.
Myth # 5: I won’t need as much income when I retire
Reality- Today your monthly income includes- travelling to work, picking up the kids from school, eating out, etc. Most of us feel that during retirement we won’t have to deal with such additional expenses and our income requirement will reduce. However there are 2 kinds of retired people these days- those who prefer living a quiet and subdued life as they grow older and the others are those to want to use all the free time they finally have to travel and explore the places they always wanted to, take up new hobbies and have a fun filled and enjoyable time during their retirement. If you are anywhere close to the second type of person; then you need to plan your future finances today. With improved means of travel even for the elderly; many of us have left these activities as something we want to pursue in the future. Hence in reality you may in fact require a good income to be able to live the retirement life you want.
Myth # 6: My kids will take care of me
Reality- You feel that in the worst case scenario you have your kids to take care of you. But what if they too are not well settled in their career by that time? Moreover you may not like taking money from your children as they too might have a family, other expenses and responsibilities by then. Most parents sacrifice their future for the sake of their children today; but in reality they also need to take care of their own future needs to be independent in their retirement; as the future cannot be predicted.
Myth # 7: Saving for other things is more important
Reality- This year I need to start saving for a car, a home, a holiday and so on. If you are getting lost in your today’s need; it is important to take a step back and look at your life as a whole. Saving for retirement is actually a priority because that is the time you will not be making much or any income.
Myth # 8: First I will get married and start a family
Reality- You may feel there is still time to save for the future, once you start a family then you can think about the future. But today the reality is much more different than what it was before, a lot of the younger generation today is getting married late and planning kids also later. If you wait till later then you might have very less time left till retirement; which mean higher amount to save every month. This could get extremely difficult with a long list of other expenses.
The Bottom Line
It is best to start early while making retirement plans. Don’t be afraid to save as much as possible for your retirement funds; as these don’t need to be locked away until retirement and can be accessed as a last resource if needed. All in all it is better to know your facts, do all the right research and steer clear from these myths; which could otherwise get in the way of your secure future and retirement needs.