Your daily cappuccino may be killing your pension

Shruti and Ravi have a penchant for coffee. Each of them spend about Rs 100 per day, sometimes even more, on coffee. This alone costs them Rs 2,500 a month. Then there are the weekend night-outs with movies, pizza parties and so on. By the 25th of each month, these millennials are out of money. So when parents ask them to save and think about retirement, all the youngsters say is 'papa paise nahin hai'!

If Shruti and Ravi reduce their coffee, they can save for retirement. As per NPS Trust calculator, a 25-year old saving Rs 1,000 per month till 60 years and investing in 10% return instrument can get a monthly pension of Rs 7,657 (based on 40% corpus in the annuity). The annuity rate is assumed at 6%.

The government has announced Rs 3,000 pension for unorganised workers in the interim Budget. But youngsters in the organised sector can plan for their retirement easily. Read on to know how.

No salary SMS

Retirement is seen up as a golden period of abundant time and fun. But remember there will be no salary SMS once you retire. Government employees may be better off as they are entitled to pension after retirement. But those in the private sector, who have no pension to fall back upon, must plan ahead.

Youngsters, often in their first or second job, value their weekends, and rightly so. Given their long daily work schedules, weekends are when they recharge themselves. But thanks to the consumer culture, many youngsters spend lots of money to have 'fun'. The hard-earned money goes out of their pockets to the cash registers of restaurants, cafes, pubs, hotels, resorts, etc. The best part is young people don't even acknowledge the problem. Those wafer-thin budgets are already getting extinguished within 20-21 days, so there is nothing left to save. But, goals like retirement will require money to be saved and invested.

Three decades ago the best-paid professionals earned a top income of Rs 2,500-3,000 per month. Seems like pittance today, doesn't it? Even the best salaries you earn at the peak of your career, will no doubt look very small, too, when you look back 30 years after your retirement. Growing living standards, smaller families, shorter work tenure and longer life expectancy are setting up youngsters for a terrible retirement phase. And we have not even talked about inflation: the silent money killer. If you retired with a princely sum of Rs 1 crore today, 30 years later it would be worth only about Rs 13 lakh. "I know I need to save, but I can't. Lot of money that gets spent. My salary of Rs 27,000 is not enough. Maybe I will be able to after three to four years," says 24-year old Rahul Sharma, who lives with his parents in East Delhi.

Retirement blueprint

Despite scores of studies showing that Indians, especially youngsters, are not preparing for retirement, the fact is that retirement cannot be wished away. It is an undeniable fact of life. Youngsters may say there are 25-30 years left, but the delay will cost a lot of money. For every 10-year delay in regular saving, your monthly pension may reduce to one-third.

There are different ways to save for retirement. Be it traditional avenues like Employee Provident Fund and Public Provident Fund, to National Pension System and retirement mutual funds, youngsters today are spoilt for choice. Bank fixed deposits are not great because they attract high tax and also deliver lower-inflation adjusted returns. In fact, only equity-linked retirement products like NPS and retirement MFs make sense for somebody who is planning for a retirement that is 25-30 years away.

Nimesh Shah, MD & CEO - ICICI Prudential AMC says: "The best time to plan for your retirement is when you are young and working. Investing in a long-term MF scheme enables in building a good retirement corpus. It also gives flexibility of Systematic Withdrawal Plan (SWP) to meet regular cash flow needs, post-retirement. A MF is a steady long-term vehicle to plan for retirement."

With costs of living, medical expenses and inflation rising with each passing year, it has become important to plan for one's retirement years early in life. The retirement fund also addresses the emerging realities of India where people live long after retirement and also people now aspire to retire earlier than before. ICICI Pru AMC's recently launched ICICI Prudential Retirement Fund is among the latest in the retirement MF space where products from AMCs like UTI, Reliance, Principal, and Tata already exist.

Mission retirement

Unfortunately, many investors often mix up retirement saving with other goals. Chennai-based S Vardhini, in her mid-30s, saves money for her retirement, her child's future education and marriage. She saves the money in one avenue. This approach is not right, say financial planning experts. Mukesh D Dedhia, director, Ghalla Bhansali says: "We have to treat retirement planning as separate from savings for children's' education, marriage, housing, car, traveling, medical expenses, etc. Each and every requirement need to be treated separately as per specific requirements."

Factors specific to each individual could be current income, past savings, inherited wealth, the stability of income, current expenses, number of family members, the health of family members and especially of the earning member, immediate and future family responsibilities, relations amongst family members, partners, colleagues, Dedhia advises.

Naveen Kukreja, CEO & co-founder, Paisabazaar.com wants youngsters to invest in Equity Linked Savings Schemes (ELSS) and other equity mutual funds, given that young investors in their 20s and 30s would have at least 25-30 years to build a retirement corpus.

"Equities beat other asset classes and inflation by a wide margin over the long term. Moreover, longer investment horizon gives youngsters more time to recover from market volatility and benefit from the power of compounding. ELSS also provides tax saving up to Rs 1.5 lakh in a financial year, under section 80C," Kukreja adds.

Apart from inflation-beating returns, equity MFs also offer a higher degree of liquidity, as they can be redeemed whenever the need arises. Even the lock-in period involved in ELSS is just three years, which is the shortest amongst tax saving and retirement products such as PPF, pension Ulips and NPS. Your investment in pension Ulips and PPF gets locked in for five years and 15 years respectively, whereas, under the All Citizen Model, your NPS investment is locked until retirement.

"Unlike traditional pension plans such as pension Ulips and NPS which involve a compulsory purchase of low-return annuities, equity MFs do not involve any such provision. For example, you need to compulsorily utilise at least 40% of accumulated NPS corpus for the purchase of an annuity, and the balance of up to 60% can be withdrawn as a lump sum. With average life expectancy in our country rising, compulsory purchase of a low-yield annuity would increase the risk of running out of your retirement corpus during the lifespan," says Kukreja.

START SAVING EARLY TO RETIRE HAPPY

• For every 10-year delay in regular saving, your monthly pension may reduce to one-third
   
• Someone whose retirement is 25-30 years away should look at equity-linked products like NPs and retirement MF schemes
   
• Treat retirement planning different from other financial goals