Saving for retirement is an important, yet often neglected financial goal. Some don't pay much heed to it thinking it is years away and some salaried individuals find comfort in the fact that a portion of their salary is directed towards the Employees' Provident Fund (EPF). However, depending solely on your EPF contribution for post-retirement earnings is not a good idea.
To help with retirement savings, traditionally, in any country, there is a three-tier or three pillar retirement framework.
The three pillars are:
Pillar 1- Public pension
Pillar 2- Occupational pension
Pillar 3- Personal pension
For someone looking to save for retirement it helps to understand what each pillar is and how they are going to impact their retirement savings.
Pillar 1- Public pension
The first pillar caters to the need of social insurance and hence called the public pension. Aimed primarily at the old and poor, such pension plans are completely financed by the government.
An example of this is the Indira Gandhi National Old Age Pension Scheme. It provides monthly assistance of Rs 200 and Rs 500 to people above 60 years and 80 years, respectively, who to belong to below poverty line families.
Pillar 2- Occupational pension
The second pillar caters to the salaried individuals, i.e., where there is an employer-employee relationship, either in a government set-up or in private companies. In 2004, the government transitioned from defined benefit (DB) to defined contribution (DC) pension for all employees joining from January 2004 (excluding defence services).
Government employees who entered service prior to 2004 would, however, continue to get pension in the form defined benefit. Government employees need to mandatorily contribute towards National Pension System (NPS). Unlike in DB-based pension DB system, in NPS the growth during the deferment period and even the annuities during the post-retirement period are market-linked and hence is not a fixed amount.
For private sector employees, though, contributing to NPS is optional unlike EPF which is mandatory. The return in EPF unlike in NPS are set by the government each quarter of a financial year and are linked to the yield of government securities.
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Pillar 3- Personal pension
The third pillar caters to voluntary savings directed towards one's retirement. This could your investments towards any financial product like the Public Provident Fund (PPF), NPS, Atal Pension Yojana, retirement plans of mutual funds, pension plans of insurance companies, bank fixed deposits or through any other scheme where funds are earmarked for one's retirement.
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Pillar-3 is the most important pillar of the three and it is because of two reasons.
First, according to some estimates, a majority of India's workforce is in the unorganised sector (over 80 percent). For these people, pillar 3 becomes extremely important as they will not have access to pillar 2 and 1. Even for those who are part of pillar-2, i.e., employed and contributing towards provident fund or NPS, the quantum of corpus from these products will not be enough to take care of your post retirement expenses and needs. The need to save after properly estimating your post retirement needs is what makes Pillar-3 the most important route towards a better retirement.
Second, pillar 3 assumes significance because of increasing life expectancy. With one spending more number of years during retirement, the pension amount would increasingly become insignificant. As per World Health Organisation, India's life expectancy has risen from 62.5 in 2000 to 68.3 in 2015.
The impact of rising life expectancy has been captured a report by Crisil titled, 'Financial security for India's elderly' where Hemant G Contractor, Chairman, PFRDA states that, "Demographically, India will transition slowly from a 'young' to a 'greying' country, where persons above the age of 60 would increase from 8.9 percent of the population now to 19.4 percent by 2050. And those above 80 are likely to increase from 0.9 percent to 2.8 percent. Continuously declining inter-generational support within families makes it imperative to have a well-developed, self-sustaining pension system in the country."
How to save for your retirement
Even if one has the support of Pillar-2, use Pillar-3 extensively. But, do not start saving for retirement without calculating how you will actually need. Once you know how much you need to save every month, keep a separate basket earmarked towards your post retirement needs.
Firstly, consider your monthly expenses at current costs. Then, assuming an inflation rate of about 5 percent inflate them for the number of years left for you to retire. This gives you the amount of inflated monthly expenses you would need to survive after you retire.
Thereafter, estimate how much you need to start saving from now till your retirement age to amass a corpus that could provide you the inflated monthly amount. There are several retirement calculators on the web to help you calculate this figure. Lastly, consider the investment products that you want to invest in to help you accumulate your retirement corpus. You could go for equity mutual funds that can help you create a corpus big enough to last through your retired years.
