PPF- The building block to a happy retirement

I have always tried to keep a distinction between ‘Savings’ and “Investments”.  To me, savings is the first level of comfort I must absolutely have and where I do not want to take ANY chances with capital erosion. Generally, we are asked, how much money do I need  when I no longer can bring in a regular monthly pay cheque home?

Blessed is that person who can give a precise answer. Too many imponderables, that include things like longevity, health, dependents (it is possible that you stop working at sixty and your children are still in college, given the late marriages that happen nowadays), loans etc. And to that we have to add a guess number for the monster called inflation. And of course, our ‘needs’ at that age can vary from person to person.

I do not like to walk that track. I would like to make the best of  what I earn, what I can save and what I can invest.  My approach does not start with economics or finance or numberwork. I am merely trying to address mental security or stability.

This is where I start with PPF as the first and compulsory outlay, each year for the entire working life. The initial period of fifteen years can be extended by five years at a time. Do not close your account after the first fifteen.

If you have the will to put aside a lakh and fifty thousand, every year, in the first week of April , then this is the tax free amount that awaits you:

            At the end of  15 years                                 Rs.44 lakh

            At the end of  20 years                                 Rs.74 lakh

            At the end of  25 years                                 Rs.118 lakh

            At the end of  30 years                                 Rs.183 lakh

Even accounting for inflation, the amounts are not small. And the importance of starting early is apparent from the above table. Simply take sixty as the retirement age and work back to see how many years of PPF investing you will do. If you start five years late, the amount you have drops dramatically.  For not saving in the first five years of your earning life, your final corpus could be lower by as much as Rs.65 lakh!

This amount provides the first level of savings that accumulate over time. So long as inflation is under eight percent per annum over this thirty year period, your monthly savings are protected. And all interest is tax free.

At the end of thirty years, if we close the PPF account and put the money in to a liquid fund, it will easily provide us with a lakh of rupees every month for nearly twenty years.  So a core part of your lifestyle could easily be met.

Yes, your investments will be there too. The amounts that you put in to equity after putting away the full extent of PPF every year. Depending upon your earnings, the investment portfolio will take care of the rest. I do not think there is too much number work involved now, if you take this approach.

Of course, if you are a double income family, then the PPF can be double of what this is. Once you see the numbers, you realise the magic of compound arithmetic.

Wealth that you create through your investment portfolio should be yours to liquidate, at a time of your convenience. Never depend on liquidating an investment to meet a known need. What could happen is that at the point where your need materialises, the market value of your investment may not be what you want or you are forced in to liquidating at a distress price. Barring medical emergencies, I guess most needs can be estimated in an approximate fashion. The important thing is that for known needs, the money we need should be without risk to the capital amount.

What I am saying above is not guaranteed to get you the best returns. At the same time, you will not be at the mercy of market forces and worry over economic uncertainties.  I am a strong believer in equities as the vehicle for wealth creation, but to me equities can never be part of any savings portfolio.

The important thing is to start saving as early as possible. Today, most of the younger generation can afford to start early. It is a question of choices. Whether you want to spend the money on a movie or at a pub or put the money in to a PPF account first and then plan the finances.

R Balakrishnan

(balakrishnanr@gmail.com)

February 23^rd, 2015