Increasing longevity:

According to a January 2023 report by Pension Fund Regulatory and Development Authority (PFRDA), India’s pensions regulator, during 2014-18, life expectancy at 60 was 17.4 years for males and 18.9 years for females*. This is expected to go up with rising income and better access to healthcare services. Clearly, longer lives call for large retirement savings.

Younger for longer:

Ever improving quality and access to healthcare services means that in the future, the retired will be leading more active lives. The question arises as to how does one provide for a 25 year retired life with investments in approximately 35 year work life?

Steps for enabling Retirement Savings

Get the retirement big picture:

Retirement savings in some countries, especially in the west, is supported by what is termed as “three pillars.” First, government supported old age pension for every citizen. Second, mandatory employee retirement savings for every employee such as provident fund. Third, retirement savings with self-directed investments.

Thus, retirement planning is essential part of financial planning. Retirement investments need to be part of the investments for other major needs made on receiving pay, and before meeting any expenses.

Factor in provident fund savings:

Retirement savings happen by default with Provident Fund (PF) contributions from the pay before it comes to any employee. In Employees’ Provident Fund (EPF), a major provident fund in India, 12%# of the basic pay is deducted from the pay for PF contribution with a matching contribution by employer. As PFs invest money mostly in lower risk debt investments, returns have limited upside potential.

From 2011-12 till 2023-24, EPF interest rates hovered in the 8.25-8.5%^## range. Compare this with the average of annual inflation rates during this period of almost 6%^. On the other hand, 10 year annual returns from higher risk equity investments like a Nifty 50 index fund was about 13%^^.

With the prospect of ever increasing retired life and medical inflation, typically much higher than general inflation (estimates for recent years being 9-14%^^^), there is strong case for self-directed retirement investments.

Estimate retirement savings:

This will provide the savings target. It will be determined by a host of factors like remaining work life, expected provident fund savings and any other retirement savings like gratuity. You can take the help of a qualified financial advisor.

The early start imperative:

An early start to retirement investments can make a big difference. You can start small and save big. A person starting at age 23 years with monthly investment of Rs 1,000 that grows at 12% annually, ends up with Rs 64.31 lakh after 35 years on retirement at age 58. A person starting 5 years later in the same investment ends up with Rs 34.95 lakh, or 45.65% less.

Early start along with periodic increases in regular income may help in delivering potential results. In our example, with a 10% annual increase in the monthly investment, the person ends up with 1.78 crore, or 2.76 times the savings with monthly investment of Rs 1,000( The above analysis is based on estimates and is for informational purposes to explain the concept of goal planning; the returns can vary based on the type of scheme selected, its investment strategy, stock selection, market conditions, government policies etc.).

Kickstart equity investments with ELSS:

Under the Old Tax System, one can get tax deductions of up to Rs 1.5 lakh under Section 80C. Those adopting it can invest in ELSS, with ELSS full form being Equity Linked Savings Scheme. Like other equity mutual funds, ELSS also invest in equities and have the potential for high returns in the long term i.e., 8-10 years, after riding out short term market turbulence. Like other mutual funds, ELSS funds also provide the convenience of investing pre-decided amounts, as small as Rs 500, in an automated way through a Systematic Investment Plan (SIP).

Gradually diversify investments:

Over time, you may consider other equity mutual funds such as SIP investments in an index fund based on large cap index like Sensex, Nifty 50 and Nifty Next 50 and Nifty 100. Subsequently, consider SIPs in large cap mutual funds. However, owing to the risk associated with investments in these schemes considering your risk appetite we suggest you consult your financial advisor before investing.

Consider mutual fund retirement schemes

They are offered in different variants like only equity or mix of equity and debt investments. Mutual fund retirement scheme can follow an age-based strategy with equity investments reduced as the investor approaches retirement. This reduces risk and secures gains from equity investments. Exit restrictions like a 5-year lock-in encourages investor to stay invested while tax-efficient and automatic portfolio rebalancing compared to individual equity and debt investments, is yet another advantage.

ELSS, index fund, large cap mutual funds besides mutual fund retirement scheme can be the mainstay or what experts term “core” retirement investments. One can consider small investments in higher risk equity mutual funds such as mid cap mutual funds and small cap mutual funds which can constitute the “satellite” portion. ELSS and periodic increase have been mentioned above too.

Periodically increase regular investments

Over time, you may consider increasing your regular investments with Top Up SIP to boost savings. Here, regular investment in SIP is periodically increased by a pre-defined amount, says hypothetically 10% annually.

Use lumps sums to boost investments:

Parts of lump sums such as bonus, commissions, gifts, and arrears can be used to supplement regular investments. In mutual funds, this may be conveniently done with Systematic Transfer Plan (STP). Here, the lump sum is parked in a low risk fund like a liquid fund and then followed up with regular investments in existing investments or new mutual fund investments. However, we suggest you consult your financial/tax advisor to know in detail about the tax implications before investing.

Periodically review and rejig your portfolio:

Progress review can be conducted once a year where investment performances can be compared to scheme benchmarks and funds in the same category. Replace funds with funds in the same category when performance lags benchmarks for 24 months.

To sum up, for a financially planned retirement, one needs disciplined efforts throughout one’s work life, in the following broad trajectory:

• Early in work life, arrive at the retirement savings target. Make a start with SIPs in ELSS, combining retirement savings with tax savings
• With pay hikes, increase regular investment amount with Top Up SIPs
• Add other equity funds like index funds and large cap mutual funds, besides small amounts of mid cap mutual funds and small cap mutual funds after considering their risk appetite of the investor and consult your financial advisor to know in detail about the Scheme before investing.
• Annually review progress of investments, comparing them with benchmarks and peer funds, and take corrective action if required.

Retirement may appear distant in early work life but the truth is that it takes half a life of planning and efforts for a comfortable other half.

Source Reference

* https://www.pfrda.org.in/myauth/admin/showimg.cshtml?ID=2511

** India Population aged 80+ years, 1950-2023 - knoema.com

*** https://www.livemint.com/news/india/indias-elderly-population-to-double-by-2050-surpassing-number-of-children-warns-report-11695865492972.html

# ContributionRate.pdf (epfindia.gov.in)

## InterestRate_OnPFAccumulationsSince1952.pdf (epfindia.gov.in)

^{^}https://www.statista.com/statistics/271322/inflation-rate-in-india/

^{^^}https://www.amfiindia.com/research-information/other-data/mf-scheme-performance, details for 10 year Nifty 50 index fund returns on July 15, 2024

^{^^}https://www.livemint.com/money/personal-finance/medical-inflation-in-india-reaches-alarming-rate-of-14-reveals-report-11700634947658.html; https://www.milliman.com/-/media/milliman/pdfs/articles/medical-inflation-and-health-insurance-productsin-india.ashx