Employee’s Provident fund - Retirement corpus

In the last article we read about Employees Pension scheme. Now if you are part of the Employees pension scheme you are part of the Employees Provident Fund as well. See the government has thought about you. Did not get it? As you are part of the Employee Provident Fund, you are automatically saving for your retirement. This is in addition to the pension which you would get from the Employees Pension scheme. When you looked at it, the pension figures looked so partly. But along with this fund, you would be saving substantially, in addition to getting tax deduction.

Let us see how. Assume a fresher starts working at the age of 22 and his starting Basic Salary is Rs.10000. He would be contributing 12% of this to Provident fund. In addition the employer would also be contributing the same amount. So there is Rs.2400 getting saved from your salary every month. From this Rs.541 would be going to the Employees pension scheme. So you would be saving a net of Rs.1859 per month, which comes to around Rs.22308 per year. 

Now the government has declared an interest of 8.75% on this.

Now if you retire at the age of 58, you would be saving for 36 years. If we keep contributing the same amount for 36 years, the amount contributed becomes Rs.8.03Lakhs. Now this is without interest and we have not considered yearly increment. Assume a yearly increment of 10%. The amount after 36 years with 8.75% would be Rs.1.86 cr. Now this can definitely give you a good annuity. In addition to the annuity from Employees pension scheme.

We are always worried about our retirement and say we are going to find it difficult. The only reason for this is we keep dipping into this retirement corpus, without thinking. We feel that since we are allowed to withdraw from it, it is our right. But then, we are hurting our future. If it is such a pressing need, go ahead and withdraw, but withdraw in the form of loan. So that you repay whatever you have withdrawn. This will keep your retirement corpus intact.

Now we have seen how easy it is to build a retirement corpus of almost Rs. 2 cr. But most of us just do not think.

We have seen the rosy picture, let’s see the dark side as well. With current inflation, this amount of Rs.1.86 cr, will not give us enough annuity as the interest earned is not more than the inflation. Hence to take care of inflation we should look at stocks. By stocks I mean invest through SIP’s in Diversified Equity Mutual funds. You do not have to start with a big chunk, start with a Rs. 500 SIP and keep increasing it in the same proportion as increase in salary. This will give you a much bigger and inflation adjusted corpus.

Though we know that Stocks have always beaten inflation, Economic Times have shown that in the last 20 years, Employees Provident Fund has beaten the Sensex. On long term Stocks have given an average return of 13 to 15 %. So it is always good to have some portion in stocks.

So don’t be disheartened go ahead and start enjoying your life, start with this small investment to build a better future.