Writing about retirement planning for youngsters though looks odd and strange, it is unavoidable and essential since the average life expectancy of present young will be around 90 years, on account of advances in medicine and technology. They will have to support themselves that much longer to ensure healthy and worry free retirement. If one retires at 60-65, it will be necessary for him to maintain himself and his family for 25-30 years. Unless investment planning is done early to build adequate Retirement Fund, it will be difficult to maintain existing lifestyle due to rising costs and dwindling income.
Even if one is well placed in government job or job in organized sector, the amount he will get on retirement by way of accumulated Employee’s Provident Fund (EPF), Gratuity, encashment of unpaid leave salary etc., will not be adequate to maintain his lifestyle due to inflation unless he has parallel investments.
Once you commit yourself to build Retirement Fund there will be a paradigm shift in your whole approach and attitude to money matters. You will be more money conscious, financially prudent and tax savvy. Your knowledge about finance, economics and share market will grow. Wasteful expenditure will be curtailed and you will look forward to value buying.
If you start early, amazing power of compounding works for you. You will be able to build a sufficient corpus to live a comfortable retirement life of 25-30 years. For example, if you want build a corpus of Rs 3 crore in 35 years, your monthly outgo will be around Rs 4,600 at the rate of return of 12%. If you start 5 years later you will have to save Rs 8,500 every month to build the same corpus and further 5 years later it will be Rs 16,000 per month. And at the rate of return at 10% per annum, it will be Rs 7,900, Rs 13,200, Rs 22,600 respectively. Find out the corpus fund you will need depending on your working life, earning capacity, maintenance expenditure after factoring inflation and accordingly increase savings for investment proportionately.
There are several options available to invest your savings, depending on your risk taking abilities, preferences and needs.
Public Provident fund (PPF) should be part of every young earners portfolio especially if he is in business, since he does not have benefit of Employees Provident Fund (EPF). PPF is risk free, tax deductible with tax free interest of 8.1% per annum. Every year one can deposit minimum Rs 500 and maximum Rs 1,50,000 which is eligible for tax deduction u/s 80C. To get maximum interest, deposit should be made before 5th of every month. Deposit of Rs 1.50 lakh every year for 30 years will have maturity amount of Rs 1.87 crore.
One of the sure way to beat inflation is investment in equity shares of professionally managed sound companies with good track record, on a long term basis when stock markets are down, which happens periodically. This offers maximum scope for capital appreciation and these are very liquid. Dividend is tax free. No tax on long term capital gain is applicable if sold after 12 months. However you should never indulge in speculative share trading which is highly risky. Equity market has provided a compounded annual growth rate return of 16.85 which is higher than any other asset class.
You should also simultaneously invest in equity mutual funds or debt-equity fund under Systematic Investment Plan (SIP) which evens out ups and down in stock market. Rs 1,000 invested monthly under SIP for forty years at average return of 12% per annum. will fetch you Rs 1.18 crore at the end of 40 years. You can multiply this by increasing your monthly contribution in diversified mutual funds. Equity Linked Savings fund provides tax saving and capital appreciation. Investment upto Rs 1,50,000 is eligible for deduction from your taxable income u/s 80 C which results in maximum tax saving of Rs 46,350 if you are in the highest tax slab.
National Pension Scheme (NPS) is also one of the products which can be used for retirement planning on which additional tax deduction is allowed upto Rs 50,000 u/s 80CCD(1B).
Normal tendency of the young first time earners is to buy traditional insurance plans like endowment policies or money back policies named and marketed by insurance companies in exotic terms, where you get assured amount in case of death or on maturity without realizing that returns from traditional policies do not offset inflation and therefore is not a good option as investment. One should know that the Insurance is for protection against risk of death and not for investment. Instead it is prudent to buy term plan insurance policy which provides life cover against risk of death for specified period of time without any return. Term policies do not have maturity benefits at the end of policy term but in case of death, the dependent gets the full sum assured. Premium is quite low and constant throughout the term of the policy as compared to endowment policies For example annual premium for Rs 25 lakh cover for 30 years term at 25 years age is just Rs 4000 as against Rs 92,000 for endowment policy of same cover and term. If you invest the difference in secured Public Provident Fund you will get much higher amount than you would have received on maturity of Endowment Policy. In case you have borrowings for business or housing loan, adequately cover your life to the extent of loan so that in the event of unfortunate demise, loans could be repaid with claim proceeds.
Having mediclaim health policy is a must for person of any age to take care of your hospitalisation expenses which are getting prohibitive day by day. Premium paid upto Rs 25,000 is tax deductible u/s 80D.
Buying or constructing your dream home should be part of your life plan. However, youngsters should defer this till they are comfortably settled in their jobs. Housing loan facilities at competitive interest rates for different durations are provided by different banks and housing institutions. Apart from emotional satisfaction and appreciation in value of property, interest on loan upto Rs 2,00,000 and repayment of principal upto Rs 1,50,000 is tax deductible. While budgeting for your house, ascertain your financial capacity to pay Equated Monthly Installments (EMI) which covers interest and principal for repayment of housing loan. In old age, in case of need, this house can also be used to have additional income under Reverse Mortgage Loan scheme.
Avoid multiple credit cards with high limits and exciting names which tempt you to buy unwanted merchandise. Pay dues in time. If you are not able to pay on due dates you may end up paying interest at an exorbitant rate of 36 % per annum.
Whenever you have an opportunity to buy property in Goa with clean title at reasonable rates, do not miss. In the long run, this will appreciate faster than any other asset.
I have given this recipe for retirement planning for youngsters based on present scenario which may need changes during the course of journey of life depending on changes in economic situations for which one should be alert.
