For most of you, holding an EPF account with your company or investing separately in PPF could be the only retirement plan in place. This means of saving may have held water about a decade ago, but, for the upcoming generation of retirees, dependence on EPF and lack of any mandatory pension schemes may mean that they are at some real risk of falling short of capital, post retirement.
From returns as high as 12% for a good part in the 90s; interest in EPF has been on a steady declining trend, delivering less than 9% in recent years.
The recent announcement about making small saving rates more dynamic, in line with market rates (change every quarter), also means that the days of locking into fixed rates are almost over. Your fixed income instruments too would have dynamic rates and that also means lower rates in a falling rate scenario.
Other than PPF, most of you may invest money for your retirement in fixed deposits. Now, besides these instruments being tax inefficient, their returns, post tax, hardly beat inflation.
Consumer price inflation (CPI) has been on the rise, particularly in the last 10 years and has crept to an average of 8.5% annually over this period. That means you need to earn a little over 12% (if you are in the 30% tax bracket) to beat inflation. If you have been investing in deposits, thinking you are building wealth for your retirement, think again.
A last option that many think will solve their retirement fears is to buy a pension plan. True, a pension plan will do what it says — provide you with pension. But can you be sure if the pension is sufficient? Will it be sufficient, when the premium you pay actually generates returns not over 6% in most cases? Yes, because insurance companies provide you with a fixed income, they also park your money (till retirement) in low risk, low returning options. That also means that the pension you get will be sub-optimal and not even cover you cost of living 15-30 years from now.
How does inflation affect your savings & investments?
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