Tuesday, May 29, 2012

Prepare your own Retirement Plan

The retirement planning industry is starting to get matured in India or well it has already matured enough with the presence of more than 10 players which offer umpteen products related to retirement planning or pension funds. What surprises me is that how did an industry flourish in a field where none is needed. Yes, precisely none is needed. 

Before getting into the details I would first like to brief about the functioning of these funds:
You pay monthly installments for years till you retire and after retirement they pay back the money. There are two modes of payments offered: 
1) They pay a lump-sum amount after your retirement or 
2) They pay small amounts till you die depending upon the terms and conditions.

The main reason I am writing this article is to make you aware that the preposterous funds like pension and retirement planning funds are not required and unnecessary. Are not we self-sufficient in planning for our own retirement. How can some third person plan for our retirement better than ourselves.
Keeping apart the theoretical part, lets move on to the practical application.
I'll show you how these funds are not actually more profitable then a Fixed Deposit.
Let me explain with the help of a real life example:
There is a fund which asks for 4K/month till your retirement and pays back 1Crore at the time of your retirement. So for investing in this fund for 40 years, you'll have invested approx. 20 lakhs and will get 1Crore in return. Well, looks fair enough. Isn't it?    

Lets check it out: 
Investing 4K/month @ 10%/annum for 40 years compounded annually will give you: 
2Crore 68Lakhs 31Thousand 8Hundred and ninety rupees.

So in fact you loose more than 1 Crore rupees.


This was an ideal scenario which never exists. Taking a practical scenario:

Investing 4K/month @ 10%/annum for 32 years compounded annually will give you:

1Crore 2Lakhs 6Thousand 8hundred and 88 rupees.

You lose more than 2Lakhs.

I have taken the interest as compounded annually but actually it is compounded quarterly. So the interest amount will be further more. Also most of the time the rate of interest offered in not 10% but around 9.75%. So the effect will be negated. But the facts and figures are before you. 

Further there are other risks related to investing in such schemes and until we read the offer document completely and miss out few important clauses, these risks will persist. Some of these funds have market based risks which can never be eliminated. And after all aren't we smart enough to plan for our own retirement.