I'm sure all of you see hundreds of advertisements from insurance companies to mutual funds, promising you an early and rich retirement. So today on 30 Minutes to Wealth, we ask, do you really need those investments to put up your feet?
And if you're under 30 and watching this show, you perhaps want to flip this channel now. “Retirement planning and me?”, you might ask! “I'm too young and that’s a long way off.” No, not really and we'll tell you why.
We all dream of it - putting our feet up and having nothing to do when we get up the next morning, take our own sweet time pouring over the newspaper with endless cups of tea and coffee. And once we're finished with that, guess what? Still nowhere to rush to…you move on to perhaps cooking a great meal or browsing the internet for chalking out a great vacation! Well, whether you are 30 or 50, caught as you are running on life's treadmill, dreams of early retirement seem so mouth watering! There are of course many ways to get set for retirement. But today, we'll tell you how to use a simple financial investment to get there and you figure out whether you are on track towards saving for your retirement.
BIG QUESTION: Are you saving for your retirement?
Most of us find retirement planning very tough. We tend to save sequentially and for the most immediate need. First the house, then the kids’ education and then we look at saving for our own selves. And that is around 50. It is already too late. It is also far away. Today is more important than tomorrow.
In fact, in the US, behavioral economists have designed a saving plan called Save More Tomorrow - that automatically allows a person to bump up the deduction towards the retirement fund each year by a certain percentage. The success of this program shows that we need a retirement planning tool that SILENTLY, PAINLESSLY allows you to save for the future.
And guess what? India, for the salaried employees already has such a tool! The Employees Provident Fund that allows you to put away as much as 24 per cent of your basic each month into risk free, fixed return product. I know young people who groan at this deduction, but let’s just take a look at what this quiet saving results in.
# Rs 1.5 crore slowly silently
# Current salary: Rs 15,000 a month
# Grows at: 10 per cent per year
# EPF interest: 8.5 per cent per year
# At the end of 30 years YOU GET: Rs 1.5 crore
But you need that 30 years of NO withdrawals for this to work.
And more importantly, since this is such a large part of our savings, we need to maximise its utility.
Also there's a little known fact, which you all need to look at carefully. If you maintain a EPF account for more than 10 years you become eligible for pension and the pot of gold you need to aim for. Now here's how it works.
Each month 12 per cent of your basic salary goes towards building your retirement corpus. Your employer matches this contribution, but just 3.67 per cent goes towards the corpus, 8.33 per cent goes towards a pension scheme that kicks in when you turn 58. But you have to stay with one EPFO account for at least 10 years.
Also you need to know that this money is yours.
The pension you get is based on a formula that is linked to your last drawn pay. But unless you do what we just discussed, the pension will be very small. So, do tell accounts to hike up the pension contribution to 8.33 per cent of the basic and not stop at Rs 6,500.
When you change jobs, if you withdraw your PF corpus, you have the option to leave your pension account active.
# For withdrawing PF you will fill Form 19.
# For withdrawing pension you will fill Form 10C.
# The same form will give you an option to continue the pension with your new employer. Ideally continue your PF account.
So if you're salaried you pretty much have a corpus building towards a good retirement fund.
These are few things you need to remember:
# Max your contribution to 12 per cent of your basic salary plus
dearness allowance.
# Don't encash your EPF account when you move jobs. Get a transfer.
# If you stay in the EPF for at least 10 years, you can get pension when you turn 58.
# Don't withdraw your pension scheme money even if you encash your EPF. Instead, get a scheme certificate, which you can give to your new employer and carry forward your pension account.
Now, how to mimic the EPF product yourself? And the upcoming NPS regulated by PFRDA? If you are self-employed and do not have access to an EPF account you had no options but to do it yourself. You will have to use a combination of PPF and mutual funds to target a retirement corpus. You have two options here:
# Do it yourself - invest in funds and then at retirement manage your corpus to generate an income
# Use a pension product from an insurance company
Now, the first approach is preferable since it allows you to make choices throughout your life.
But if you already have a pension plan, do continue it, but move to a high equity allocation today and move to higher debt as you get near the retirement date.
A pension product from an insurance company is non-portable; this means that if the fund manager does badly the cost of switching is very high.
But from April 1 you will be able to have your own pension account once the PFRDA regulated New Pension System is extended to the whole country. We will do a special show on this new system closer to April - so do write in with questions if you have any already and we will get them answered from the pension regulator.
Time now for our new product analysis and today we're looking into Non-Convertible Debentures from Tata Capital because so many of you have written in to ask about the product. Adarsh Shetty from Mumbai, SBL SRIVASTAVA from Bhatinda, Satish Kumar from Bangalore, Lovneesh from Mumbai and many more...So here are the basics and then we'll give the verdict on whether you should buy it or not.
# NCD Closes on: 24 February 2009
# Tenure: 5 years
# The instrument also has Put and Call option in 3 years.
Simply put, 'Put' refers to your right as the investor for choosing to go for an early redemption. 'Call' refers to the right of the company to call for premature redemption and return your money. Another good. The instruments can also be traded on the exchange.
Four Options of interest ranging between 11.5 per cent to 12 per cent compounded:
# Option I: Monthly interest. 11.57 per cent
# Option II: Quarterly interest. 11.73 per cent
# Option III: Annual interest. 12 per cent
# Option IV: Cumulative. 12 per cent compounded annually
Features:
# No tax deduction at source (TDS) on the interest earned
# Interest will be taxed as other income, that is, added to your total income and taxed.
# If the company were to wind up, NCD holders will rank above all unsecured creditors and other investors.
# Need a demat account and PAN card to invest
Risk: The double AA rating. Usually we like triple A, but the strength of the promoter in this case will override this threshold for this issue.
For investors looking for fixed return: CAN BUY
Coming back to our topic this week, if you're starting early towards a retirement fund, you're doing a really smart thing. If you are close to retirement, do ensure you have as less debt as possible. Home loan, credit card, personal loans - must try and get those over. I'm sure you already know all that, but hey! It’s worth a reminder.