Are monthly investments in the PPF account enough to build a retirement corpus?
When it comes to retirement more is better. Retirement corpus should be enough to allow you to live your life without compromising on your lifestyle of expenses. Financial planners will advice you to take into account inflation when you calculate how much you save for your retirement.
How much money you need in your twilight years again depends on your spending habits and major life events during your life journey to retirement. If your average monthly expenditure is Rs 65,000 right now, you can expect it to be Rs 321,890.80 in 25 years time assuming an acceptable annual rate of inflation of 6%.
If you plan to get married and settle down then almost inevitably you will encounter major life events for which you may need to dip into your savings —which you had planned to use during retirement years.
In such as scenario, is it prudent to rely on just one Public Provident Fund account wherein you duly deposit Rs 150,000 per year? At the current rate of return, an investment of Rs 150,000 per year or Rs 12,500 per month will get you Rs 40,68,209 at the end of 15 years. If you reinvest the amount for another 15 years, it is expected to turn into Rs 1.09 crore. You can verify these calculations from any of the numerous PPF calculators available online for free.
Coming back to monthly expenses, your current expenditure of Rs 65,000 during the month is likely to be Rs 321,890.80 in 30 years time when you expect to retire assuming you are 30 years of age currently and plan to retire in 30 years. At this rate, your 30 years of savings from the PF account will come to an end in less than 4 years.
While PPF is a must-have in your financial portfolio owing to the security it provides along with tax deductions under Section 80C, it is also important to look at equity funds as a means when it comes to long-term savings planning.
Large-cap equity funds have historically given 11.92% returns in the last 10 years, according to Value Research. The large and mid-cap category gave 14.32% returns in the same period. Now compare this with 7.1% returns of PFF.
However, there are a few things to note here: equity investments are riskier as compared to debt allocation of PPF so the former is not meant for someone who is risk averse. Also, your expenditure after retirement will significantly less then right now so mostly expenses will be significantly less. Also, if equity large-caps returned 11.9% in the 10 last years it doesn’t mean it will be the same in the next 10 years.
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