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It is a very common belief among the working class that the Employee Provident Fund (EPF) money deducted from the salary every month will be completely sufficient to spend 20 to 30 years after retirement comfortably. Salaried employees rest assured that the lump sum amount of PF received at the age of 58 or 60 will become a strong support for them in their old age. However, according to financial analysts and wealth planners, relying solely on PF funds can prove to be a serious financial risk in today’s economic realities, increasing life expectancy and ever-increasing inflation.
Why relying only on PF funds can become a big risk?
Employee Provident Fund is certainly a safe, guaranteed and tax-free return instrument, but relying solely on it has several practical drawbacks:
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Health and Lifestyle Inflation: The general retail inflation rate in India may hover around 5% to 6%, but the medical and health sector inflation is increasing at the rate of 12% to 14% annually.
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Breakdown of funds on job change: Often people make partial or complete withdrawal from PF in the early and middle stages of their career while changing jobs or for personal expenses like marriage, buying a house and children’s education. This breaks the effect of compounding and ultimately the maturity fund becomes much less than expected.
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Long Life Expectancy: Due to modern medical facilities, the life span after retirement is now 80 to 85 years or more. This means that you will have to maintain your lifestyle on the same funds without any active salary for the next 25 to 30 years.
How much fund will be needed for retirement? Understand the ’30X Rule’
As a general rule of thumb in financial planning, at the time of retirement you should have Corpus at least 25 to 30 times the annual household expenditure Must be present.
If your monthly household expenditure today at the age of 30-35 is ₹50,000, with an average inflation of 6%, you will need at least ₹2.5 lakh to ₹3 lakh per month to maintain the same lifestyle when you are 60. This means you will need a large corpus of ₹6 crore to ₹8 crore to live a comfortable life. Usually the normal EPF contribution hardly reaches even half of this figure.
5 effective financial solutions to secure old age
To make your retirement completely financially independent and secure, you need to adopt a multi-asset investment strategy:
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1. Equity SIP in Equity Mutual Funds: If you have a long time of 15 to 20 years left for retirement, invest a part of your savings in diversified equity mutual funds through Systematic Investment Plan (SIP). Equity easily beats inflation by giving average returns of 12% to 14% over the long term.
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2. National Pension System (NPS): NPS is a low-cost and great retirement tool. It offers automatic balancing of equity and debt, along with an additional tax benefit of ₹50,000 under Section 80CCD(1B). On maturity, 60% of the fund is available tax-free and 40% is guaranteed as a regular pension for life.
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3. Select VPF option: If you want a fully secured government guarantee, start making additional contributions to the Voluntary Provident Fund (VPF) through your company. In this also attractive interest is available like EPF.
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4. Separate and Comprehensive Health Insurance: Never rely solely on the group health cover provided by the company. Take out an individual super top-up health insurance cover of at least ₹20 lakh to ₹50 lakh for yourself and your spouse well before retirement, so that a medical emergency does not deplete your core fund.
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5. Post-Retirement Bucket Strategy: As you approach retirement, divide your money into three parts—the first in liquid FDs for short-term expenses, the second in regular income schemes like Senior Citizen Savings Scheme (SCSS) and government bonds, and the third in hybrid funds so that the saved capital continues to grow.
Starting on time is the key to real safety.
Retirement planning is not something that should be started after the age of 50. The sooner you start making additional investments apart from your PF, the power of compounding will make your fund bigger. Only by creating a balanced portfolio can you enjoy the second phase of your life to the fullest without any worries and financial constraints.