Financial Cocktail Samosas: Bitesized Money Morsels For You, 17/05/2023

Delaying Investments or Delaying Meeting Your Financial Goals?

“काल करे सो आज कर, आज करे सो अब!” – Sant Kabir

This part of the famous Doha fits perfectly when it comes to investments. People think that a few years of delay in their investments will not make any big difference and they can catch up later by investing more. But let us tell you this is just a myth!The truth is that you’ll lose out on the power of compounding for that skipped period and it could matter much more than investing more later. Moreover, the cost of investments increases with an increase in delay due to the ‘time value of money’. One has to invest a much higher amount to get the same level of overall gains if they had started earlier.

Let’s understand this with an example:

Let’s say you invest the money immediately but in a staggered manner through SIPs with an investment horizon of 20 years. Rs 25,000 invested each month getting 11-12% annually for a period of 20 years will get you a pool of Rs 2.1- 2.5 Crores. If you delay this start of investments by 10 years you will have to shell out over Rs 1 lakh a month to reach the same corpus target of Rs 2.1-2.5 Crores in the remaining 10 years!

Thus, you have to invest FOUR times more for the same results if you delay your investment by 10 years.

Do not wait for the ‘right time’ to start your investments. Volatility is an inherent nature of the markets and has always remained so. The power of compounding helps us ride this volatility by averaging out the highs and lows of the market. It is important to remember that time in the market is more important than timing the market to generate long-term wealth. Therefore, it is essential to start investing early, stay disciplined, and reap the benefits of compounding gains to achieve financial goals.

So, don’t miss the starting gun and say later that no one told you when to run (with full credits to Pink Floyd for their song, ‘Time’).

Don’t wait for your retirement corpus to come or some amount to accumulate before you start. Starting gun has been fired a long time back…

(Contributed by Manish Kumar, Relationship Manager, Team Vikrant2, Hum Fauji Initiatives)

Retirement can be seen as a second childhood, affording individuals the opportunity to engage in activities that they may have had to forego previously due to work responsibilities. However, unlike during their working years, retirees may not have a steady monthly income, especially if they do not have an employer-provided pension like armed forces retirees. Thus, retirement planning becomes a strategic game, to create a reliable income stream that will last a lifetime.

Starting to plan early is crucial, as retirement living is the only financial goal that cannot be met through loans. At its simplest level, retirement planning involves estimating expenses, accumulating savings, and investing wisely to ensure that those expenses can be covered.

This strategy advocates asset allocation of your retirement corpus into different ‘buckets’ based on the time horizons you would withdraw from each of these.

The first bucket (NOW) meant to cover the initial years (say 3-5 years) of retirement would primarily invest in safer instruments such as short-term debt.

The second bucket (SOON) meant for the intermediate term (say 10-12 years) can invest in a mix of medium-term debt and equities.

The third bucket (LATER) which one would withdraw from after 15+ years, can invest in equities. This approach aims to balance market volatility and spread corpus availability over a longer period.

Retirement planning can be a difficult task, but breaking down your portfolio using the bucket technique as retirement approaches and identifying your sources of income can help you prepare for the income you will require.

The above can be studied in detail in our CEO, Col Sanjeev Govila’s recent article in Moneycontrol, available at the link:

(Contributed by Aman Goyal, Financial Planner, Team Prithvi, Hum Fauji Initiatives)

What Our Clients Asked Us in Past 7 Days: The Ongoing Story of EPF..!!

Question asked: What is this drama going on about increased pension from EPF?

Our Answer is as below:

EPF or Employees’ Provident Fund is a government scheme set up by the EPFO (Employees’ Provident Fund Organisation). This scheme is meant to promote savings among corporate employees and help them build a sufficient retirement corpus for their well-being.

The EPF is not one scheme. It comprises three different schemes with three different objectives:-

  • First part where retirement benefits are accumulated, is basically the wealth generation part.
  • Second part is the employee pension scheme (EPS) to generate pensions for employees after the age of 58 years.
  • Third part is the Employee Deposit Linked Insurance Scheme (EDLI) which is a life insurance cover and additionally contribute to by the employer.

Here, both the employers and employees contribute 12% of the employee’s basic salary and DA to EPF. Of the 12% of the employer’s contribution, 8.33% of the salary is directed to the EPS account and 3.67% to the EPF scheme. The employee’s contribution is directed solely to the EPF Account.

Recent Changes in Pension to be Received

Now, the EPFO subscribers can contribute more under the EPS to get a more pensionable salary which was, till now, capped at Rs 15,000 per month. But for this, the employee would have to agree to transfer more funds from the provident fund to the pension fund going back until September 2014.

Things to consider before you opt for a higher pension under EPS

Loss of benefits of compounding: A large portion of money moving from EPF to the EPS to avail of a higher pension will deprive one of the benefits of compounding.
No interest in EPS: The contribution to EPS does not earn interest the way it does in the EPF and you do not get the choice of getting a lump sum at retirement as you’re paid a pension.
No pension too early retirees: An EPFO member becomes eligible to receive a pension only after completing 10 years of service, or after attaining 58 years of age. So, if you take an early retirement, opting for a higher pension may not benefit you.
Reduced pension to spouse: The nominee or the legal heir is eligible to receive the full amount invested under the EPF account at the time of death of the EPF member. However, the spouse gets only 50% of the pension in case of death under the EPS.
Financial goals: Will you need a lump sum at the time of retirement to fulfill a specific goal? Will you be comfortable managing your money in case you receive your EPF corpus in one go? Such factors can also play a big role in deciding if you want your retirement corpus in a lump sum or a higher annuity after your retirement.

Our Recommendation: You should not opt for enhancing the contribution towards EPS as a Systematic Withdrawal Plan (SWP) in Mutual Funds is a much more flexible alternative to serve the purpose of your pension requirements – in bulk, in regular pension mode or both – for your or your earning child’s post-retirement life.(Contributed by Jatin Uppal, Deputy Manager, Hum Fauji Initiatives)

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