Wondering If your Provident Fund Will be Enough for Retirement? Here’s a Low-Down of the Things You Need to Know

Feb 07, 2018 | 1 year ago | Read Time: 3 minutes | By iKnowledge Team

Put a price tag to your dreams and save for them. Don’t just depend on your provident fund for retirement.

We tend to think of old age as something very distant and, often, debilitating. But look around. Ratan Tata is 80. Amitabh Bachchan is 75 years old. Biocon founder Kiran Mazumdar-Shaw will be 65 soon. What we think of as the post-retirement years are as productive as any other. One difference is that these years bring a lot of freedom. However, fitness and comfort come at higher prices at this stage of life.

Think hard. What do you want when you hit that age? Do you want to live the dream and chase your passion? But will your provident fund (PF) be enough to fund all your retirement dreams?

The answer is, it’s time to rethink. Your PF may fall short for several reasons listed below. Here’s a list of questions you need to consider for understanding if your PF is enough:

  • Your annual contribution is capped at Rs 1.5 lakh. So, even when you want to save more, this savings is not under your control.
  • Keep in mind the 8.5% rate of interest and the years you have in hand. The amount you invest each year might not outstrip inflation.
  • You will not have liquidity if you invest only in PF. And, as you near your retirement years, you need to keep more in liquid savings. This will allow you to meet emergencies and ensure an adequate annuity.
  • With PF, you can’t invest jointly with your partner or children. In case of untoward incidents, this is a handicap.

How do you know how much you need?

Make a list of your current expenses, including liabilities and savings. These should include the following:

  • Monthly living expenses like grocery, utility bills, vehicle and house maintenance charges.
  • Long-term goals like a second home, or children’s education and wedding expenses.
  • Periodic expenditure like vacations, car upgrade, house repair or renovation. These require you to fork out a lump sum.
  • Age-related expenditure. This includes medicine costs, live-in help, and higher expenditure on health insurance premium.
  • Your estimate of the rate of inflation. You need to figure out an approximate idea of how much more expensive things will be when you hit retirement age.

Enter the data into our retirement planning calculator to help you understand the corpus you need to build, if you plan to live a happy and worry-free retirement.

How to pad up your retirement fund

Ideally, the lower your age, the higher is your risk appetite. Decide if you want to venture into market-linked investments such as ULIPs. Or, you want to invest in a non-linked pension fund. When you look at such investment options, note the following:

  • Risk appetite: Can you afford to risk losing capital in the pursuit of high profit? If the answer is yes, you should consider investing in ULIPs.
  • Tax benefits: If you want to earn tax benefits on the premium paid or on the maturity benefits – both ULIPs and non-linked pension plans are great options here
  • Need for liquidity: Before investing, you need to ask yourself, will this instrument lock up your funds? Or will you be able to liquidate it at times of need? ULIPs here offer a lock-in period of 5 years, post which you can withdraw a sum based on your policy details. Whereas a non-linked pension plan will offer you a lump-sum amount only at the time of maturity, which is during your retirement.
  • Expected rate of returns: Compare the returns you will get from a PF to other savings and investment instruments such as ULIPs or pension plans. If the returns from PF indicate to be lower, it is time to diversify your investment portfolio.
  • Mode of premium payment: Will you be more comfortable paying a one-time premium? Or will a smaller monthly payment be more convenient? Either way, make sure to pay your premiums on time so that your investment in ULIPs or pension plans continue uninterrupted from your insurer.

For instance, consider the Aegon Life Insta Pension Plan. It ensures a lifelong annuity income for you and your spouse. You pay a single premium (starting from Rs 1 lakh). You may choose an annual or a monthly pay out mode. There is no upper limit on investment. But you cannot surrender the policy or avail a loan against it. What you get in return is the security of a lifelong additional income.

Finally, the amount you can put in each month towards creating a pension fund must be considered keeping in mind your regular expenses. Your home loan EMI, insurance, and children’s education are all expenses that you must meet before you retire. But you must not sacrifice your future. So, calculate your expenses and save where you can. Carve out an amount that you can divert towards funding your post-retirement life.


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