Look Beyond EPF For Retirement

The question isn’t at what age I want to retire, it’s at what income. — George Foreman.

If there’s one thing that evokes a lot of passion among the salaried and regular wage earners, it’s the age-old subject of provident funds (PF) — and retirement kitties. Finance minister Arun Jaitley’s latest Budget proposal to tax EPF withdrawals of 60 per cent of your retirement corpus saw the twitterati and the media explode with critical comments about this harsh move — and the manner in which tax collections were sought to be increased.

People do bank largely on PF for almost everything — from their children’s weddings to medical emergencies to, yes, steady retirement income, regularly. But, now that Jaitely has responded and rolled back the proposal, the question still comes to mind: Why do most people bank largely on PF for their retirement? Aren’t there other suitable options? Shouldn’t everyone increase their investments with additional savings?

For quite some time now PF has been sacrosanct for the salaried class in India. Experts point out, however, that utilising it for emergencies is quite imprudent; investors should create additional buffers and kitties for matters such as these in their retirement years.

Says Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund: “All these are retirement funds; they are not dip-at-will kind of funds. If you want something for your medical needs, savings have to be made separately, or health insurance savings have to be introduced. Keeping PF flexible is not the answer.”

Jaitley, for his part, was trying to nudge people toward taking up annuities or securing steady retirement income, i.e., a regular stream of income for the duration of their waning years. However, as most people utilise this nest egg for nearly every purpose other than steady income, those who are not savvy enough with utilising their retirement EPF monies prudently would be sorely affected.

Says Thakkar: “The whole argument is driven by people who are savvy enough and who know how to invest for returns. But there are so many people who do not have a clue as to what to do with their retirement corpus. An annuity for them is simple and provides recurring income. Sure, inflation is a risk, but people will not be out of money or income.”

Most of the time people dip into retirement savings such as the PF kitty in later years or when funds are urgently required. “But, in the later years,” states Thakkar, “having enough money becomes quite a vital issue. So, as a concept, annuities are generally good; they provide people with a monthly replacement of their erstwhile paychecks. A one or two per cent additional return would not serve the purposes of a less-savvy retiree as he is looking for steady monthly income. Hence, we should work on the annuity structure and improve, rather than discard, it.”

However, investors could do more: take a hard look over and above their PF retirement kitty, say experts. A recent study by Principal Retirement Advisors showed “children’s education (65 per cent), household expenditure (64 per cent) and medical expenses (60 per cent) as the top three expenses slated to increase after retirement, though children’s marriages (59 per cent) feature prominently.”

But, what is more surprising is that most investors do not even know how much money would be available to them after retirement. Forty-five percent of respondents had no knowledge of how much money would then be available to them, and 44 per cent had not adequately factored in the impact of inflation during retirement.”

In India, most people lack retirement savings, except of course the EPF, the core saving. In this dire context, investors should move forward with retirement plans, and still make additional investments over and above the EPF.

Says Mukesh Dedhia, a certified financial planner and director at stock brokers Ghalla and Bhansali: “I see a pension plan is good, but it can at times be meagre. Adding adequately and regularly to your retirement portfolio is more important than just buying a product once or twice for retirement, and then relying solely on it. One has to ensure that one is regularly putting away enough money so that the corpus suffices for one’s retirement.”

People often find themselves running out of money during retirement because they haven’t saved enough. Experts suggest that most people should not look at more retirement products, but at more savings. Says Dedhia: “What is a retirement plan? You need to create a corpus, maybe through a pension plan, maybe through PPF, EPF or through mutual funds. Today, we are very conscious that we have to build up an inflation hedge; we have to consider returns that, at least, match, at best, beat inflation.”

Many savings options are now widely available in India, but rarely as focused on retirement as the 401K in the US. Experts say this is a good option, one where you can choose your own investments, those that offer market-based returns. Through one’s 401K account, one can even choose to invest directly in equity. Says Thakkar: ‘You cannot withdraw money, but you can choose your own instruments and, within a designated limit, purchase your own investment vehicles. This is something similar to equity-linked savings schemes in India. ELSS, however, are for three years. We need an alternative, where funds can be locked in till retirement. Three-year ELSSs do not really serve the purpose. People invest in ELSS and hold, for the tax benefits, for just the minimum period. Once the tax-benefit period is over, they withdraw the funds.”

For a complete and adequate retirement package over and above the PF, investors should consider the entire basket of investment options such as mutual funds, ULIPs and other financial savings products over and above fixed deposits. In the post-retirement years, experts point out, once a sufficient corpus has been built, investors can pick a product for regular income such as an annuity, or a tax-free bond.

Investors should also realise that two additional risks arise in retirement, longevity and re-investment. Unless, of course, you know how long you are likely to live, and that your income would suffice though your twilight years.

The re-investment risk can, and will, keep cropping up. For example, if, post-retirement, you purchase a tax-free bond, one that gives you a return of 6 per cent, after 10 years you would have to see, for re-investment, what the interest rates then are. If the interest rate then is 4.5 per cent, that’s what you’d get; if the rate is 10.5 per cent, well, you gain. Says Thakkar: “When you buy an annuity, you are passing on that kind of risk to an insurance company. Those with a huge corpus can take that risk and still be content with the returns. Not everyone, though, is able to secure that kind of return. Hence, for some, it makes good sense to take out an annuity.”

In this day and age, however, there’s no denying that investors would have to look seriously at additional savings options. This means investing further in mutual funds or ULIPs. Says Dedhia: “People ought to add adequately and regularly to their retirement portfolios. If you are working on an asset allocation plan, that’s good. If not, a balanced fund is a good plan, where asset allocation is done automatically and where costs are lower.”

If you have invested in mutual funds for retirement income, a systematic withdrawal plan could provide the necessary regular cash flow for monthly expenses. Systematic withdrawals allow investors to get a fixed sum of money every month, or quarter, depending on one’s needs.

At the moment, annuities are taxable as income in the hands of investors, whereas long-term capital gains are not taxed if a corpus is held in a balanced or equity fund for over a year. Hence, a systematic investment plan would be taxed accordingly. This could take care of your additional income requirement through the retirement years.

Till retirement, investors must keep adding to their corpus in those products which enjoy the flexibility and the tax advantage; on retirement, they can suitably choose between an annuity and other regular income products.

Experts also point out that one never really retires, that retirees should never really stop earning even if the regular retirement age is 60 for salaried employees. Says Dedhia: “At 60, you may feel no pressure to earn. But if you have the ability, keep doing so.”

Legendary boxer Foreman packed a punch on this several years ago.

ENSURE COMFORT IN YOUR TWILIGHT YEARS

Saving for retirement should not be funded by just the Employee Provident Fund

1 Avoid dipping into your retirement kitty for any other expenses (medical or otherwise) other than retirement
2 Retirement plans should consider investing in capital-building assets over and above a deferred annuity plan
3 The retirement wealth kitty should cover basic investments such as regular and periodic investments in mutual funds or ULIPs
4 Tax deductions are available if you save in products such as ULIPs, but investors have to keep it going till retirement
5 Investors can buy an immediate annuity plan to cover part of their expenses after retirement. Annuity receipts are, however, taxable as regular income, so investors should also keep other income options
6 Systematic withdrawal plans of mutual funds are fine enough to keep cash flows going during the retirement years
7 Investors should invest in the Public Provident Fund to buffer up the retirement capital if they have not done so
8 Keep in mind that longevity and re-investment risks are factors than can impact your retirement and would require additional buffers

Clifford.alvarez@gmail.com