Five tips to build a large retirement corpus

Getting a high-paying job in a big company is no longer enough for a financially secure retired life. In general, private sector companies in India don’t pay pensions. Retirement benefits in the private sector are limited to employee provident fund (EPF) and gratuity. Even the latter is available to only a small proportion of employees who work in the organised sector.

Retirement planning is now the employees’ responsibility that takes a backseat given our near-term goals such as buying a house, car, children’s education, maintaining our lifestyle and other immediate expenses. This creates financial anxiety as one gets closer to the age of retirement.

However financial planning for post-retirement life is not as difficult as it may sound. You need to follow some financial discipline and make the right savings and investment decisions early in your working life. Here are five ways to save and invest for a financially secure retirement:

1. Choose a job with higher basic pay

Retirement benefits such as employee provident fund and gratuity are based on basic salary rather than your overall salary, also called the cost to the company (CTC). It includes perks such as house rent allowances, special allowances and other reimbursements and variable pay. 

A higher share of the non-basic component increases the monthly cash in hand but it comes at the cost of lower long-term savings in your EPF account and lower gratuity payment. 

This means that you will retire with an inadequate corpus in your EPF account even if you enjoyed higher CTC in your working life. So, when comparing two job offers not only compare CTC but also the basic salary.

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2. Start saving early

If you feel that the monthly contribution to EPF and gratuity is not sufficient for the lifestyle that you expect to lead after retirement then start saving a part of your take-home salary. Timing is very important here since the sooner you start longer your savings will have to compound.  

You can start by contributing 5-10 percent of your monthly income in relatively risk-free instruments such as bank recurring deposits (RD), post office RD or public provident fund accounts (PPF) in banks. 

You will be able to create a corpus only if you save religiously for at least 15 years or more.

3. Save taxes by investing in income tax-saving instruments

Income tax can punch a big hole in your monthly take-home pay but you can lower your tax outgo by investing in instruments such as EPF, PPF, new pension scheme (NPS), life insurance policies, equity-linked savings instruments (ELSS) offered by mutual funds and unit-linked insurance plans (ULIP) sold by life insurance companies. 

Also Read: Five best ways to save tax and create a retirement corpus

These instruments have the dual purpose of saving taxes and helping you build a retirement corpus. You can invest in these schemes either every month or make a lump-sum contribution once every year. Employee and public Provident funds and New Pension Schemes (NPS) remain the best way to save income tax and save for the long term. You can save tax up to Rs 1.5 lakh per annum through EPF and PPF and an additional Rs 50,000 through NPS. Remember, these tax savings instruments are only available if you opt for the old income tax regime. The new income regime offers no deduction for any tax-saving instruments.

4. Invest in low-cost index Exchange Traded Funds or ETFs

Low-cost ETF mutual funds are the best way to take advantage of long-term wealth generation opportunities available in the Indian equity market. ETFs mutual invest stocks that are part of benchmark stock indices such as BSE Sensex 30 and NSE Nifty 50. Also called passive funds, their portfolio mimics the composition of the benchmark indices and takes away the investment discretion from the fund manager. The returns offered by these ETFs are similar to that of the benchmark indices that they follow. 

The best part of ETFs is their low expense ratio which translates into management fees that can be higher net returns in the longer term. 

The expense ratio for ETFs can be 75-80 percent lower than that charged by actively managed mutual funds where the fund manager builds the portfolio based on his or her research.

5. Invest in high dividend-paying stocks

Well-managed companies reward their investors and shareholders with consistent dividend payout year after year. This annual pay-out generally grows with the growth in their business and profits. 

The dividend income can become a good source of income post-retirement if you create a large enough portfolio of dividend-paying companies. 

Also Read: Ten best dividend-paying stocks right now

For example, the Sensex 30 companies currently offer a dividend yield of 1.26 percent which translates into an annual dividend income of Rs 1.26 lakh for an investment of Rs 1 crore in a portfolio of stocks that are part of the index. The dividend pay-out by Sensex companies has grown at an annualised rate of 14 percent in the last five years. But there are many stocks with dividend yield of 3 percent or higher. If you stay invested in well-managed dividend-paying companies for 10 or more years, annual dividend income will become substantial. The other option is to invest in dividend yield funds that invest in high dividend-paying companies.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist). 

Also Read: Seven ways to save and grow your money

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