You have probably received a spam email with the title “Retire with Rs 1 crore” or “Retire and get Rs 1 crore and Rs 50,000 per month”. If you check your spam folder, you will probably see a few more variations.
Most of these will be from various insurance companies, selling you a variety of ULIP, Endowment, Moneyback and Pension plans.
Don’t buy them. Read on to find out why.
Firstly, let’s see what they are offering. In the email which I received, it was offering 1 crore by investing just Rs 85 per day. Or Rs 85 x 365 = Rs 2585 per month.
Let’s assume you are 30 years old and will invest this sum for the next 30 years.
Your total contribution will be 2585 x 12 x 30 = Rs 9,30,750.
So essentially, they are saying your money will grow from Rs 9.3 lakhs to Rs 1 crore.
This works out to an annualized return of ~12.5 %.
Not bad you will say. And we would agree to. However, please remember that this is a claim and not a guaranteed return
If you had invested the same amount in Equity (either through ETFs or Large cap equity mutual funds ) instead of an insurance policy, you could have probably got returns ranging from 15% to 18%
What difference will an extra 2.5% make, you might be tempted to ask ?
Not much – Instead of 1 crore, you will have an extra 55 lakhs or Rs 1.5 crores.
But the issue at hand is not whether you will get Rs 1 crore or Rs 1.5 crores – The issue you need to keep in mind is, whether Rs 1 crore after 30 years will be enough to meet your needs.
The policy says, you can either get a pension of Rs 50,000 per month or Rs 1 crore.
You need to ask yourself, will Rs 50000 per month after 30 years be enough to meet your expenses.
Let’s look at a scenario.
Assume your current monthly expenses are Rs 50,000 per month. Just on account of inflation, your expenses will increase per month.
Let’s assume inflation will be 4% per annum on an average over the next 30 years (Hopefully India will develop as a nation and inflation will go down from current 7 to 8% levels)
Taking inflation into account, your monthly expenses of Rs 50,000 today will cost you Rs 1.62 lakhs. At that point of time, your pension of Rs 50,000 per month will be woefully inadequate to meet your expenses.
So yes, don’t buy a pension plan which promises you Rs 1 crore. It may look like a huge amount today but will probably not be sufficient in the future. If you are 30 years old, you will probably need a retirement corpus of about 5 to 6 crores to lead a comfortable retired life.
Another point you need to keep in mind is that life expectancy is increasing and you will probably live for another 20 to 25 years after retirement. Your corpus needs to give you a regular income for your post retirement period too !
OK, but what about market risk of investing in Equity Mutual Funds – Aren’t they subject to the volatility of the stock market ? Aren’t insurance policies a better option ?
Ummm, not really.
If you look at the chart below, while the sensex has been pretty volatile over the last 30 years, it has delivered about 16 to 17% annual returns on an annualized basis. The risks in equity are averaged over the long term.
And, guess where do the insurance companies invest your money ? Yep, they also invest in the same stock market.
But isn’t an insurance product guaranteed to return my money ?
Nopes. Most market linked products will not guarantee returns. The agents will tell you that you will probably get more but no one will give it to you in writing. Not even LIC.
Invest your money in a planned manner. For planning a pension or your retirement, here are somethings you need to keep in mind:
- Identifying your current and potential future monthly expenses
- Estimating the right amount of corpus or money you will need at retirement to give you a monthly income
- Investing your monthly savings in a risk adjusted diversified asset class to create your corpus
- Monitoring your portfolio and gradually moving from an Equity heavy to a debt heavy portfolio as you approach retirement.
- The earlier you start the better situation you will be in when you retire.
While Retirement Planning is not rocket science, it’s not a piece of cake either. Talk to us to see how we can help.