Indians believe Rs 1.3 cr corpus is ideal for retirement: Is this enough?

Half of India's population between the age of 30-55 years believes 59 years should be the age of retirement and thirty-two years is when one should ideally start retirement planning, as per a survey conducted by HDFC Pension.

Only 20 per cent feel that serious retirement planning should start before the age of 30 This proportion is higher amongst males, salaried, and higher income groups (more than Rs 20 lakh annual household income). 

The survey was conducted across tier 1, II and III cities among 1801 citizens, of which 70 per cent were salaried and 30 per cent were business owners. 

For most people, savings are generally channelled towards their child’s education or set aside for future medical expenses.

Child’s education/marriage takes precedence in lower-tier markets, whereas retirement planning takes a back seat compared to metros.

The objective of the survey was to understand consumer outlook towards retirement and gauge consumer familiarity, appeal and consideration, leading to the ‘NPS Preference Index’ which can be tracked over time.

What is the ideal retirement corpus?

Surprisingly, the post-retirement financial corpus is estimated at an average of Rs 1.3 crore,  which is observed to be less than 10X of their current annual household income reflecting the need to educate consumers about the recommended levels of retirement corpus, noted the study.

With regard to retirement, an industry norm is the 30X rule, which means that your retirement corpus should be at least 30 times your annual expenses today.

For example, if you are 50 years old and your annual expenses are Rs  9 lakh, then as per the 30X rule, you need 30 times Rs 9 lakh to retire comfortably. That is Rs 2.70 crore. 

Take inflation into account

Motilal Oswal noted that one always needs to inflation costs on an annualized basis. Suppose, your current monthly expenses are Rs 50,000. In 30 years, this amount would have multiplied due to inflation. Assuming an average inflation rate of 7% every year, you will need Rs. 380,600 to meet the same expense 30 years from now. 

Adhil Shetty, CEO of Bankbazaar believes as a rule of thumb, it’s a wise idea to set aside 20% of one’s income towards a retirement fund in your 20s. You could gradually scale up the contributions to 30% in your 30s, and 40% in your 40s—or to the highest extent that your income and savings allow you.

Shetty believes the earlier you start investing, the less you will have to invest to build a higher retirement corpus. Let us assume a 25-year-old investor starts investing a sum of Rs. 5,000 per month towards his retirement corpus. Assuming he will retire at the age of 60, he would have invested a sum of Rs. 21 lakh. Assuming an average return of 10%, the investor would have a financial corpus of Rs 1.9 crore at retirement. 

Now if the same investor had waited for another five years to start his retirement planning and began at 30 years of age, even a higher investment per month would not have generated such a high corpus. If he had invested Rs 7,000 per month for the next 30 years till his retirement, his total corpus would reach only Rs. 1.5 crore.

"Not only did he make a total investment of Rs. 25.2 lakh, which was higher than Rs. 21 lakh if he had started at 25, his final retirement corpus is short by Rs. 32 lakh," said Shetty.

Citing another example, Shetty says that if you’re 30 now and invest Rs 1 lakh in a mutual fund growing at 15% annually, you get Rs.16 lakh when you’re 50. But if you make the same investment at 40 to be redeemed when you’re 50, your returns would be Rs. 4 lakh.

Source: Bankbazaar

How to invest for retirement?

"In the 30s, it is advisable to opt for an aggressive portfolio with investments in stock, and equity mutual funds consisting of small and mid-cap schemes, and target a higher rate of return. Real estate investment is another attractive avenue that you can explore aggressively because you also get a long-term home loan support and tax advantages.

Maintain funds in liquid investments for short and medium term expenses. While investing, take care of tax implications on your returns. You can diversify your portfolio to reduce risk further. For example, PPF holdings are tax-free, as are equity investments older than 12 months on whom security transaction tax has been paid," said Shetty.

Healthcare costs biggest post-retirement worry

The biggest post-retirement life worry remained rising healthcare costs, followed by illness and ageing.  At least 64 per cent said that healthcare expenses would be the biggest expense post-retirement. 

For the majority, an ideal retirement product must provide security of capital, tax benefits, and continued income after death. People view NPS as a government-backed retirement security option.

While being a relatively new instrument, NPS ownership is at just 24%, with appealing features like tax-free withdrawals, safety (being government-regulated and benefits for spouse. Tax benefit (80C/80CCD) has a relatively higher appeal (35%) among those enrolled for NPS compared to all consumers (31%).

"While tax benefits, peers, and financial advisors trigger NPS purchase, educating people about NPS and its features is critical to drive adoption. It has further been noticed that individuals who have enrolled for NPS feel more confident about their financial health during their retirement years. It can thus be said that NPS ownership is a strong indicator of financial preparedness for one’s retirement years," said the study.

The consumer research study was conducted between August and September 2023 across 12 cities in India among NCCS A, annual household income above Rs 10 lakhs (above Rs  lakhs for Tier III cities),