Why save for your retirement? To be financially independent when you no longer work and to maintain a comfortable lifestyle after all your responsibilities like home loan repayment, children’s education and marriage etc have been taken care of.
As you near your retirement age, your risk tolerance in financial decisions and investments also go down. This is because you have limited time period and you feel you cannot afford to take any risk during the sunset years. For instance, fixed deposits and debt funds are two popular safe investment avenues that offer you capital protection as well as fixed income. So, many people shift to such safe avenues once they cross their 50s and 60s.
Why senior citizens can also consider tax-saving mutual funds
Customarily, PPFs, EPFs and life insurance schemes are the go-to investment plans, favored for their risk-free nature. We do agree that investing in fixed income schemes is one way to ensure steady income while saving taxes under Section 80C. However, the returns range from 6% to 9% and they are not exactly inflation-beating. This is where you need to make your money go all out and sweat it out for you. 80C also includes two schemes that encourage you to invest in equities – Equity Linked Savings Scheme (ELSS) and National Pension Scheme (NPS). And exploiting the return-potential of equities is one way to make your money work for you.
Don’t be asset-rich-but-cash-poor be asset-rich-cash-rich
At 30, Revathy’s annual salary was Rs. 10 lakhs, basic salary being 50% of her gross salary. She received a 10% hike every year. 12% of it went to EPF from both her and the employer, while 10% she saved for retirement in PPF and fixed deposits. She enjoyed an 8% returns and she had a whopping amount of 8.1 Cr as corpus (investment + returns) at 60. She had also accumulated assets like a house property and jewellery over the years. Remarkable, everyone said.
Now let us remember the key objective of retirement planning we specified in the beginning – financial freedom to maintain your lifestyle. Add taxes, 4-5% inflation and increasing life expectancy to the Revathy’s rosy picture – her corpus will barely last 8 years at max. Revathy’s retired life doesn’t look that remarkable now, eh? She is what financiers call asset-rich-cash-poor.
What can you do to avoid this in your retirement planning?
We say – save more. But how? There is no escaping taxes and inflation. Here, the best you can do is to select those schemes that will earn you maximum returns, while saving maximum (up to Rs. 46,800) on taxes every year. If Revathy had invested in schemes that earned her 13% to 15% returns, her corpus would have lasted for at least 25 years. And yes, it is possible to earn better returns if you explore tax saving mutual funds or ELSS under 80C.
(Author is the founder & CEO of ClearTax. Views expressed are his own.)