Why Your Provident Fund Savings Will Not Be Enough For You Retirement

  Author: Naveen Kumar

Indians are increasingly living longer than before. It is not surprising to find people in their 80’s living active lives in cities and many rural areas.  In India and elsewhere, a long life is a great blessing. However, to have a great life, especially great retired life, you need ample retirement savings. Unfortunately, that can’t happen if you solely depend on your provident fund (PF) savings for retirement income. Here’s why.

Inadequate retirement savings Let’s assume that your current annual provident fund savings is Rs 60,000. Let’s also assume that it grows at 10% annually for the next 30 years till your retirement. If you get an annual return of 8% for your PF savings in these 30 years, you end up saving Rs 2.21 crore on retirement.  While this might seem like handy sum for retirement, it will actually be inadequate for you.

How you will run out of PF savings If your current monthly expense is Rs 30,000 and the annual inflation for the next 30 years is 6%, then on retirement after 30 years, your monthly expense would grow to Rs 1.72 lakh.

Now, let’s assume that your Rs 2.21 crore retirement savings from PF, grows at 8% annually in retirement, even as inflation continues at 6% annually. This would mean that your retirement savings will be exhausted in 13 years into retirement. This means that if you are 28 and retire at 58 with Rs 2.21 crore in retirement, you will be broke at age 71.

What it takes If you want your retirement savings to last 25 years with the same conditions, you need to retire with savings of Rs 3.86 crore. So, your PF savings will leave you short Rs 1.65 crore. So, what do you need to do bridge the shortfall? First, you need to save more for retirement as PF will not be enough. Second, you need to start investing early, so that you save enough and lead a great retired life that you deserve.

Start additional retirement investing early To meet the retirement savings shortfall we just illustrated, you can invest in long-term growth investment. Equity mutual funds can be a great option for this. You can take the help of systematic investment plans (SIP) for monthly investments.

If the equity fund provides you an annual return of 10%, then, by investing Rs 8,000 per month for next 30 years, you can save Rs 1.65 crore.