What is a Retirement Fund?
Before actually building retirement Fund let’s first understand what is retirement fund. A retirement fund is a sum of money that we should set aside so that we can pay our bills when we retires from our job and no longer earns a regular income. The purpose of a retirement fund is to provide financial support during retirement years when individuals are no longer working.
How to build Retirement Fund?
We should save enough money while we are working so that we can receive regular pension after retirement which is enough for covering all our expenses at that stage and a little extra to cover unplanned events. Building a retirement fund is a long term process, it does not happen overnight. So, it better to start on early stage of our carrier and follow commitment and disciplined approach. We should focus on increasing our income and reducing our debts and then put a portion of money into a fund or scheme to save for retirement. We should set goal about the corpus that we want to build then stay committed towards that goal with full discipline. When setting goal/target amount make sure to consider inflation in that i.e. purchasing power of money decreasing with time. So it is better to use some online Retirement Fund calculator to understand that how much money you should save and invest to achieve your goal.
In India below are some of the schemes and fund which you can consider to build your retirement corpus. If you are from other part of the world then you may have equivalent schemes available in your country.
Provident Fund (PF) : A Provident Fund is a saving and retirement fund in India where portion of basic salary (usually 12%) is contributed in this fund. It is backed by government so it is fully safe and offer return somewhere between 8-9% and fully exempt from tax on maturity i.e. on retirement. In this employer and employee both contribute 12% of the basic salary so in total 24% of employee salary goes into this which on longer time with interest becomes huge Corpus. Though it also allows few withdrawals from this account based on some special conditions like if person is unemployed for more than 2 months, for self wedding, higher education, land purchase, repayment of Loan etc.. but it better to avoid withdrawal from this account unless absolutely necessary to do so, so that you can build big corpus for retirement.
Voluntary Provident Fund(VPF) : Voluntary Provident Fund is backed by Sovereign guarantee so it is a safe option for retirement fund saving. Voluntary Provident Fund is a voluntary fund contribution from the employee towards his Provident Fund account. This fund contribution is beyond the PF contribution and the maximum contribution in VPF can be done up to 100% of the basic salary and Dearness Allowance. Please note that interest on VPF is with same rate/percentage as of PF which is usually between 8-9%. The Contribution made in VPF are exempt from taxation under 80C bracket up-to maximum of Rs. 1.5 Lakh i.e. tax saving under 80C can be done up-to sum of Rs. 1.5lakh invested under various options fall under 80C like PPF, PF etc.
Mutual fund (MF) : As our target is a very long term process so we should focus not only on saving and putting money in Fixed Deposit but rather investing in Mutual Funds because Fixed deposit in best case scenarios provide return around 7-8% but Mutual Fund on average give return somewhere 12-18% . So we may get return double or even triple of what we can get from Fixed Deposits. But remember no one can guarantee return from Mutual fund as they are linked to Share market and risky but considering the past data we can say 12-15% return is quite easy to achieve. And choosing the right fund is also important, make sure to purchase the MF scheme only from trusted site or webapp i.e. registered with SEBI(Securities and Exchange Board of India). SEBI is a regulatory body in India which protect the interest of investors which are investing in Shares, Mutual fund etc.
Nation Pension Scheme (NPS) : A Nation Pension Scheme is a voluntary contribution pension scheme in India. It is controlled by Pension Fund Regulatory and Development Authority(PFRDA) which is governed by Ministry of Finance of Government of India. So it is safe investment option for retirement fund building. It provides higher return than traditional tax saving schemes like Public Provident Fund(PPF), Fixed Deposits and Provident Fund(PF) because it invest in multiple instruments like shares, bonds etc. . NPS is flexible as subscriber can contribute to NPS fund at any time in a financial year and can choose their own investment options like percentage of Equity or bond though equity is capped at max of 75% to make it less risky. Remember currently it is mandatory to invest at-least Rs. 500/- in a year to keep account active. As this is market linked scheme so no one can guarantee the return percentage but we can expect return somewhere 10-12% from this. And it also offer Tax saving of Rs. 50,000/- additionally over 80c and additionally also allow us to opt for tax free saving of 10% of basic salary which employer can contribute on our behalf, but remember we have to inform or opt for this.
Wish you all the best best towards your journey to build retirement build. And thanks a lot for reading this article 😊
