The EPFO (Employees Provident Fund Organisation) has now allowed contributions towards Employees’
Pension Scheme (EPS) at 8.33% instead of the earlier 15,000 ceiling.
The higher
Pension (that too for life) looks very tempting but as we all know FREE FOOD IS AVAILABLE ONLY IN MOUSE TRAPS and hence this needs to be dug
deeper before committing your hard-earned money.
I WILL NOT
GO INTO NITTY GRITTY OF ENTIRE EPS EPF working.
Let’s focus
here only on WHETHER HIGHER AMOUNT SHOULD BE CONTRIBUTED TO EPS OR NOT...
========================================================
Contributing a higher amount to EPS will result in a LOWER corpus of your EPF.
The NO.1
Priority in Financial Planning must invariably go to RETIREMENT PLANNING Nobody gets a Retirement Loan.
When you
build a bridge, you insist that it can carry 50000 kgs weight, but you only
drive 15000 kgs weight truck across it. That is the way you want your bridges
to be.
And that same principle works with your
retirement planning. You must make sure that your fund lasts as many years as
it can. It's better to have MORE rather than less, especially when
it comes to RETIREMENT CORPUS & RETIREMENT INCOME.
India doesn’t
have too many ASSURED return products stretching for longer duration and hence
EPFO presents a useful, suitable, stable solution for those planning for
retirement.
Peace of
mind is of primary importance and a stable pension post-retirement definitely
fits the bill for post-retirement financial security.
But...
Should you
go for a HIGHER contribution?
Does it make
sense?
LET’S DEEP DIVE
If you are a
person who is not well versed in equities or does not foresee a REGULAR income in the form of either an Annuity, Rent, or Pension then a HIGHER EPS contribution is a
MUST for you.
In an
increasingly uncertain and unstable world, a stable pension in the form of EPS
would give you PEACEFUL Sleep even before you retire as the feeling of SAFETY
is paramount for any human being.
EPS is a defined benefit plan meaning
that the amount you receive post-retirement is GUARANTEED and Pre-determined
and thus NOT DEPENDENT ON THE STOCK MARKETS
PLEASE NOTE:
1. Post
Retirement, you will NOT get any LUMPSUM but only a monthly pension through EPS
2.
Contributing a higher outgo could result in a liquidity squeeze for the present.
Are you okay with that?
if you have
other financial priorities, such as paying off high-interest debt, building an
emergency fund, or saving for short-term goals, you may want to prioritize
these before increasing your contribution to EPS.
3. If you
require funds before retirement for whatever purposes (kids’ marriage, starting
own venture), this EPS will be of no use to you as it is illiquid
4. The more
service period you have, the better will be your gains when going for Higher
EPS
5. With
Interest rates going down over the last 2 decades and also in the foreseeable
decades, the high returns that are now visible MAY NOT BE SEEN GOING AHEAD
This could
lead to RE-INVESTMENT risk for the LUMPSUM amount that you receive on retirement.
In this
scenario, a higher monthly pension will help you LOCK-IN rates for life long.
6. The
corpus in the EPS pension will not be given to you.
And on your
death, the monthly payout to your spouse goes down by a massive 50%
7.
The amount of pension you get will be FLAT throughout the retirement period
The amount will not increase as per INFLATION
and we all know how Inflation keeps eroding the value of our rupee
Rs.50,000 monthly pensions at the age of 60 will make more sense
but if you continue to get the SAME amount of Rs.50,000 even after 15 years (at age 75), you will actually have a LESSER amount in hand due to INFLATION
MOST IMPORTANT,
The Monthly
pension that you get will be TAXED
whereas the
LUMPSUM you get is TAX-FREE!!
&
THE HIGHER THE SERVICE PERIOD YOU HAVE, THE HIGHER WILL BE YOUR GAIN
In simple
terms, you have a shorter period to retire.... don’t go for higher EPS (of
course, you should take a VRS or something!)
IN CONCLUSION
If your
present liquidity needs are taken care and you can afford a higher outgo
AND AT THE
SAME TIME
if you are
okay with a HIGHER Monthly Pension but less LUMPSUM post-retirement. only then
GO FOR HIGHER EPS
FINALLY,
While planning for retirement, remember you are not 'saving
for retirement”.
in fact, you
are actually investing for *SPENDING AFTER
RETIREMENT*
And of course,
with a prudent investment approach, you can create your own pension by investing
in Equity Mutual funds suiting your Risk Profile.
Post
Retirement, start an SWP and get regular income at a frequency of your choice
and create your own pension!
All the Best for a Wealthy
Life
Regards,
Srikanth Matrubai
Qualified Personal Finance
Professional (QPFP)
AMFI Registered Mutual Fund
Distributor
Author of the Amazon Best
Seller books
DON'T RETIRE RICH
&
WEALTH OF WISDOM
All the best,
Regards,
Srikanth Matrubai
https://t.me/joinchat/AAAAAELl4KUnaJzi-JJlDg/
Excellent information loved it
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