Hardly anyone is covered by guaranteed pension today. So, plan for it

How will you meet your living expenses after retirement? Ask this question of different people and you are likely to get answers ranging from the vague (‘My children will support me!’) to the openly dismissive (‘Oh, I plan to work all my life’).

Surveys by financial firms show that Indians don’t give retirement savings priority, busy as they are saving up for their children’s higher education or wedding expenses. But this can be foolhardy for many reasons.

No cover

To start with, an overwhelming proportion of employees (even in the organised sector) today are not covered by any guaranteed pension scheme. It wasn’t like this a few years ago. Then, the Government and the public sector were the employers of choice and offered guaranteed pension benefits to all their employees. But the Government has stopped this practise since 2004 and moved its employees to the market-linked NaNational Pension Scheme (NPS). Even the Employees’ Provident Fund Organisation, which covers private sector workers, recently said it intends to discontinue pensions for new entrants earning above Rs. 15,000 a month.

No guarantees

Can’t I earn adequate income by just investing my gratuity or provident fund benefits, you ask? Don’t count on it. Until the late 1990s, people could tide over their retirement years by investing in a multitude of fixed income products — monthly income schemes from mutual funds, the Indira Vikas Patra, Kisan Vikas Patra or any number of post-office schemes, which paid out 12-15 per cent annually.

But with most of these schemes either folding up or forced to sync their returns with markets, the universe of options available to the retired for predictable income has shrunk dramatically.

The other factor that most of us don’t budget for is longevity. With better nutrition and medical care, today’s generation has to plan for a retired life that may be almost as long as their working life.

‘I plan to work until I drop dead’, some may say. But the rising incidence of lifestyle ailments suggests that a long life may not necessarily go with the energy or the physical ability to stay on the treadmill.

The inflation factor

While estimating our pension needs, all of us also need to factor in higher inflation than our parents did too. Inflation in India has averaged 8 per cent in the last ten years as opposed to 5-6 per cent in the decade before. This has significant implications for the amount of pension you will need and the savings you need to make today. If you are 30 and reckon that a monthly sum of Rs. 50,000 is adequate for your living expenses today, that will be equivalent to Rs. 2.2 lakh when you are 60, at a 5 per cent inflation rate. Bump up inflation to 8 per cent and it climbs to a steep Rs. 5 lakh a month. So, given the enormity of the problem, what’s the solution?

For one, for a comfortable retirement corpus, start as early as possible. A person who starts a systematic investment of Rs. 10,000 a month in an equity fund (earning 15 per cent) when he is 25, can accumulate Rs.14.8 crore by 60. But a person who flags off the same SIP at 40 will get only to Rs. 1.5 crore. That’s the power of compounding for you.

Two, you need to be disciplined about re-investing your interest or dividends at high rates too.

All calculations made by financial planners usually assume compounded annual returns. A good way to automate this is to park all your retirement money in cumulative plans.

Finally, the surefire way to be comfortably off by the time you retire is to ensure that you invest only in avenues that beat inflation by a good margin.

If a 30-year-old invests Rs. 10,000 a month in an equity fund SIP earning 15 per cent a year, he can accumulate a Rs. 7 crore corpus by 60. But if he opts for an 8 per cent fixed deposit instead, it will get him only to Rs. 1.5 crore.

This argues for investing a large portion of your retirement kitty in good equity or balanced funds. Once you have the nest-egg, as you approach retirement, you can always redeploy it in deposits or buy an immediate annuity. Relying entirely on safe options such as the Public Provident Fund or traditional insurance plans for your retirement kitty is sure to leave you very short of cash when you are ready to hang up your boots.


  • Start in your 20s or 30s

  • Re-invest your interest / dividend

  • Ensure you beat inflation

  • Go for annuity, deposits only at retirement

(This article was published in the Business Line print edition dated October 13, 2014)
Source : The Hindu