Don't delay retirement planning; estimate corpus as first step: Experts

Use a mix of equity funds, PPF, EPF and NPS; review and correct course periodically

The recently released 2021 Mercer CFA Global Pension Index survey (MCGPI) ranks India’s pension system 40th out of 43 systems. Futhermore, the Indian system ranks lowest on the adequacy sub-index (which refers to the adequacy of the benefits provided).

While the formal pension system has its flaws, a bigger issue in the Indian context is that over 90 per cent of the workforce is in the unorganised sector, where workers are not enrolled into a formal retirement saving system. Such workers need to plan for retirement on their own.

How much do you need to save?

When you start working, your retirement could be 35 years or more away. Any exercise you carry out to estimate your needs at retirement would be largely theoretical, since much could change in the interim.

“Initially, it would be more practical to save 30 per cent of your income and allocate one-third of that to retirement saving,” says Arvind A Rao, certified financial planner and founder, Arvind Rao & Associates. He adds that once you have reached 40, you would have settled into a lifestyle. Calculate your annual living expense then, then apply inflation to it to arrive at the amount you will need at retirement. While applying inflation, factor in both consumer and lifestyle inflation.

According to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors, “Whatever is the annual expense at retirement, you will require a retirement corpus that is 18 to 35 times that amount.”       

Once you have arrived at a corpus, calculate backward to estimate the amount you need to save each month.

A large number of variables are involved in these calculations (inflation rate, return during accumulation phase, changes in savings capacity, etc). Any of them could change. “Begin with certain estimates and review your status periodically to account for changing circumstances,” suggests Rao.

Build an equity-heavy portfolio

A long-term goal like retirement should have an equity-heavy portfolio. “Younger people who have 25 years or more can even have 80 per cent in equities,” says Arnav Pandya, founder, Moneyeduschool.

Those who have lower risk appetite may want 50-70 per cent of their portfolio in equities. Populate this portion with domestic and international funds, which could be passive or active funds.

On the debt side, salaried people would have Employees Provident Fund as a solid base. “Another good product for retirement saving is Public Provident Fund (PPF). It locks in money for 15 years (withdrawal is allowed, but conditionally, after seven years) which allows investors to create a large corpus,” says Rao. You may also use debt mutual funds. 

Financial planners also recommend using the National Pension System (NPS). “NPS, a low-cost product, offers a mix of equity and debt in the portfolio. Don’t invest only Rs 50,000 for tax saving. You may go beyond that level,” says Dhawan.

Why NPS should be a part of your retirement portfolio

• Low expense ratio
• Offers a number of options in terms of fund managers, asset classes, and asset allocation
• Tax deduction of Rs 50,000 under Section 80CCD(1B) specifically for NPS
• Tough withdrawal norms mean low liquidity, but the corpus doesn’t get spent on other needs
• However, 40 per cent of the corpus will be annuitised, and interest income from annuity will be taxed at slab rate 

Don’t leave it till too late

In the early years of work life, retirement seems distant. Other goals, like paying the house and car EMI, and saving for children’s education, take precedence. So, most don’t start saving for this goal until it is quite late. “Even small amounts invested regularly from an early age can give you a head start,” says Pandya. 

People also underestimate the amount they will need after retirement. “Don’t assume that your expenses after retirement will be much lower than they are today. Retirement planning should be one of the single largest financial goals by value,” says Dhawan.

Dipping into the retirement corpus to meet other expenses must be avoided, or else you could find yourself severely underfunded. Investing in real estate for rental income can also create problems, since rental yields are barely 2-3 per cent.

In India, younger workers willing to work at lower salaries are easily available, so you could find yourself out of a job before 60. Therefore, save for retirement with urgency. Finally, medical advancements could push up life spans, so save enough to avoid the risk of outliving your savings.