Find out how to get rid of these misplaced beliefs that can push you into an insecure retirement without adequate funds
`I shall spend less after I retire.'
FACT: No, you may not. If at all, you are likely to spend more in the first few years after retirement. While the thumb rule is that you will need 70-80% of your pre-retirement income to maintain your lifestyle, typically people splurge on travel, hobbies and other passions that they tend to keep on hold during working years. Besides, even though you will end up doling out less on commuting, children's education and loan EMIs, your medical bills are likely to go up with age. Another critical factor that works against you is inflation, which reduces the value of your money and you end up spending more for the same needs. So your nest egg needs to take into account all these factors to ensure that you are not left high and dry well into retirement.
`My health insurance will cover my medical needs.
' FACT: If you have continued with the health cover that you had in your 30s or 40s, it is unlikely to be adequate for later years on two counts. One, your health would have deteriorated, requiring a higher expense and, two, medical inflation would have pushed up the cost of treatment. On the other hand, if you have not bought any health insurance till retirement and suffer from a medical condition, it is unlikely any insurer will offer you one. Even if you get it, the premium will be prohibitively high. Hence, it is advisable to supplement your insurance and build a medical corpus, investing it in an easily accessible short-term debt fund. You should also increase the cover over the years and buy a critical illness plan as well. Alternatively, if your children's employer provides the option, have yourself covered under a corporate group plan, which not only offers a cheaper insurance, but also a wider coverage than an individual plan.
MYTH 3 `I should invest only in debt after retiring.'
FACT: The security of your capital is crucial at this juncture, but as critical is the assurance that you don't outlive your savings. Life expectancy in India has gone up over the years, from 62.3 years for males and 63.9 years for females in 2001-5, to 67.3 years and 69.6 years, respectively, in 2011-15. This implies that you will live longer after retirement and must ensure that your kitty does not dry up midway. Besides, to retain its purchasing power, the corpus will have to beat inflation and, hence, grow at a faster pace. Over 20 years, even a nominal inflation of 6% will reduce the value of `1 crore to `29 lakh.
Debt investment, with its 4-7% growth rate, will not help you achieve this. You will need to expose your funds to equity, to grow faster than your rate of withdrawal, at least in the initial years. You should know how much you withdraw each year, which will depend on three factors: asset allocation, time horizon and returns. Higher returns will allow you to make a bigger withdrawal and enable the corpus to last longer. So review your assets and assign 10-30% to equity depending on your need to supplement income.
MYTH 4 `My Provident Fund will take care of my nest egg.'
FACT: No, it will not. The PPF offers numerous advantages when it comes to saving for retirement--tax exemption on investment, interest and withdrawal, a lock-in period of 15 years, and safety of capital. However, the corpus may not sustain you till the full term of retirement. If you start investing `10,000 a month at 25 years, a return of 8.7% means that you will have `2.74 crore by the time you are 60. At an inflation rate of 8%, it may be able to last you only 7.25 years into retirement (if your expenses are `25,000 a month at 25 years and grow to `3.42 lakh at 60), not 20-25 years. Similarly, EPF is a good way to build a nest egg since you are forced to save regularly when you start earning and grows with the rise in income. However, it will also fail to provide sufficient growth to your corpus.
Hence, the Provident Fund can form a crucial component of your retirement kitty, but you will need to supplement it with investments in stocks and mutual funds, which will help the funds grow to ensure a secure retirement.
MYTH 5 `My tax liability will be lower after I retire.'
FACT: While there is a distinct possibility that your income tax liability will come down or even become nil since you won't be earning a regular salary any longer, there is an equal likelihood that it increases or remains the same after retirement. This will depend on your investments and other sources of income after you retire, including rental income from property, pension, capital gains, as well as dividend and interest income.
One of the main reasons retirees end up paying a high tax is that they hastily invest the lump sum received on retirement--Provident Fund or maturity from savings schemes--in tax-inefficient instruments. Hence, it is crucial that you plan your post-retirement investments in such a way that it helps minimise your tax outgo. This can be done through various instruments like the PPF (with its exempt-exempt-exempt format), stocks and equity-oriented mutual funds (where capital gains are tax-free if you invest for more than a year), and tax-free bonds. So, make sure you pick avenues that levy a nil or minimal tax on annual withdrawal or maturity.
MYTH 6
`Having a house is enough to retire on.'
FACT: No, it's not. While acquiring real estate is a national obsession in India equated with safe retirement, you need to have more than a house when you quit working. Though having a roof over your head should be a priority, don't forget that you need an income to fund your daily expenses in retirement. Even if you have a second house, the rent may not be enough to take care of all your needs, not to mention the fact that it is not a liquid asset and may not help you achieve your goals when you want to. So unless you have a bevy of properties, which provide adequate rental income to provide for your day-to-day expenditure, make sure that you create an asset allocation mix--equity, debt, gold, real estate--that will offer liquidity and growth.
If you apportion a large chunk of your income to a home loan EMI at the start of your career, you are losing out on the opportunity cost and power of compounding that can help build a large retirement corpus. Of course, one can resort to reverse mortgage in case of a financial crunch, but with most Indians wanting to leave the house as a legacy for their kids, it is not a feasible option for many.
MYTH 7
`Children's goals, not retirement, should be my priority.'
FACT: Most Indian parents are so intently focused on their kids' needs that they willingly disregard their own despite the fact that they no longer have pensions to fall back on. They start by building funds for the children's education and marriages and only later think about retirement. If they do build a kitty for themselves, they happily dip into it to fund other goals. However, it's time for a priority reversal. Stress on building your retirement corpus due to two reasons.
One, while your children can find other sources to fund their education, it's unlikely you will land an easy alternative to take care of retirement. They can resort to education loans, scholarships and crowd-funding; you can't. A good fallout is that loan repayment will help inculcate financial discipline and responsibility in kids. Second, they will appreciate you not becoming a financial burden for them in later years when they have their own families to take care of. So, do not depend on children or other family members to finance your retirement.
MYTH 8
`I can retire early.'
FACT: You could, but you may not be able to. While many people dream of hanging up their boots in their late 40s or 50s, it turns out to be a pipe dream. Based on a random estimation of how much they would have saved by then, they plan an early retirement, failing to take into account two things. They do not make a precise calculation of the corpus they will require to sustain them for the prolonged years of retirement. Secondly, they don't make an estimate of the funds they will require to reach their goals and end their loans and liabilities. So they are forced to abandon their plans to quit work when they realise that they haven't yet repaid the home loan or that their daughter's marriage needs financing. Worse, 10 years into retirement, they may run out of money and may be forced to seek work that will be hard to come by.
So, if you are serious about your aspirations to retire early, try and approach a financial adviser, who can analyse your pre and post retirement financial needs systematically and offer an investing road map to reach it. If you want to do it on your own, get hold of a retirement calculator before you start dreaming of a hammock in the hills.
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds
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