Why You Can't Rely On Provident Fund For Retirement

The money saved in your provident fund (PF) is unlikely to be adequate for your retirement. Here's why you need to start making other investments early in life for ample retirement savings.

Hello and welcome to FundooMoney, your 24X7 buddy for all your money matters. 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. A long life is a great blessing according to the Indian tradition. However, at a practical level, you need ample retirement savings to support a long retired life. 

Unfortunately, that is unlikely to happen if you bank solely on your provident fund (PF) savings for retirement income. In a short while, we illustrate why.

Suppose your current annual savings from provident fund is Rs 60,000. Let’s assume that it grows at 10% annually for the next 30 years till retirement. If you get an annual return of 8% on this saving throughout these 30 years, you end with Rs 2.21 crore on retirement. You will be shocked to know that this will not be enough.

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 the Rs 2.21 crore retirement savings you have, grows at 8% annually in retirement, even as inflation continues at 6% annually. This would mean that your retirement savings will get over in just 13 years into retirement. So, if you are 28 and retire at 58 with Rs 2.21 crore in retirement, you will be broke at age 71. 

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 is the moral of this story of numbers? 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.

To meet this retirement savings shortfall we illustrated, you can invest in an investment that typically provides high long-term growth. Equity mutual funds can be a great option for this. You can take the help of systematic investment plans (SIP) to help you invest every month.

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

We hope you found this useful. Do share with us and others on the channel, your views and tips on retirement investments by writing in the comments section. For more such actionable personal finance information and regular uploads, subscribe to our channel. Also, visit our website, download our mobile app and stay connected with us on Instagram, Pinterest and Slideshare.