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Three retirees are facing a dilemma. One is at the chemist shop, wondering if he should buy all the costly medicines his doctor has prescribed. Another is in a toy shop, weighing his options between the expensive gift his favourite granddaughter wants and the cheaper one his pocket allows. The third one is sitting in a travel agency, debating whether to holiday in Australia or take a package tour to Europe this year. How soon and how much you put away for your retirement will decide which of these you can be.

We don't want to sound alarmist, but quite a lot of Indians could be the person at the chemist shop. More than 24% of the 2,578 respondents to an online survey by economictimes.com said they were saving less than 5% of their income for retirement. Another 25% are salting away 5-10% of their income for their sunset years.

It is unlikely this will be enough to sustain their current lifestyles when they retire. Inflation is like Kahaani's Bob Biswas—a silent and ruthless killer. Even a moderate rate of 6% can be debilitating in the long term. The most worrisome aspect of inflation is that your expense structure will naturally change as you grow older. Health care, which accounts for barely 1-2% of your total expenses at the age of 25-30, will become one of your biggest expenses after retirement. Healthcare costs are rising 2-3 times faster than inflation. "In the last decade of a person's life, most of the savings go into health care. Unless one is financially prepared, one won't be able to afford quality health care.

Even as product prices and healthcare costs shoot up, investors saving for retirement are faced with the prospect of choppy returns. Even government managed small savings schemes have become market-linked. One of every three respondents to the survey said that their biggest worry regarding retirement was the uncertainty of returns.

Start early, retire rich

The uncertainty of returns is not as big a problem as a late start. A study of 2,000 professionals by Hyderabad-based financial planning firm, Arthayantra, found that more than 90% don't start planning for retirement in the first five years of their careers. Even by the 10th year, less than 20% would have a retirement plan in place. On an average, Indians start thinking about retirement planning when they are 35 years old, but the actual process is implemented only when they are nearing 50.

This delay takes away a vital ingredient out of any retirement plan—the magic of compounding. What one saves in the first few years of starting a career burgeons into a massive amount over the next 25-30 years. If you don't start at the age of 25-30, you lose out on the wonder years of.

Maintain your savings rate

The other big problem is not saving enough. A 2012 study by the US-based Putnam Research Institute says that the fund selection, asset allocation and portfolio rebalancing do not impact the final portfolio as much as the quantum of savings. The study looked at the impact of all four parameters on a typical retirement plan over the past 30 years and found that an investor who simply enhanced the quantum of his savings every year would have the biggest corpus compared with investors who rejigged their portfolios to include the best performing funds or changed their asset allocation annually. "Perhaps, we obsess a little too much about which funds to choose and how to fine-tune our portfolios. It would be better to put that same effort in seeing how the quantum of those savings can be enhanced.

The low-profile Employee Provident Fund is the best example of how the tortoise can beat the hare in retirement planning. The scheme's design makes it an ideal retiral vehicle. Every month, 12% of your basic salary flows into the PF account, along with a matching contribution by your employer. As your salary rises, so does your contribution. This simple arrangement has the potential to make one a crorepati if one contributes to it without a break over 30-35 years. If you start putting 2,500 a month into the PF at 25 (with a matching contribution from your employer and a 10% increase in salary every year), your PF corpus will be over 2 crore by the time you retire at 60.

For the disciplined investor, the EPF can be his one-stop retirement plan. Even for the average saver, it can account for a sizeable portion of the retirement kitty, thus bringing down the overall investment required. In the table below, the total sum required at the time of retirement may appear huge and out of reach, but if you take into account the existing savings an individual will have, the amount you need to save per month will not seem too ambitious.

Arthayantra's sophisticated online financial planning software, Arthos, incorporates not only the existing PF balance but even the future contributions. If you ignore these two factors, you will have a disproportionately high retirement requirement.

You should ideally be saving to cover 80-90% of your current expenses if you want a comfortable life after retirement. Anything less will require lifestyle compromises (see graphic). Don't include EMIs, education and other children-related expenses in this calculation. This should just be the amount you and your spouse will need to sustain your desired lifestyle after you stop working. As mentioned earlier, the pattern of expenses will change—health care, insurance and transportation costs are likely to go up, but entertainment and clothing may come down. We assume that education and loans will no longer be a worry.

Cut costs and tax with the NPS

The only glitch is that since the EPF is entirely debt-based, its returns will not be able to match inflation. Experts say that one needs to have an exposure to equity as well so that the returns can outpace the rise in prices. The other problem is that the EPF covers less than 10% of the total workforce in the country. What about the rest of us who are self-employed or working in unorganised sectors? This is where the National Pension System (NPS) comes into the picture. Open to all citizens, the government-run scheme is managed by six private fund managers. Since their launch three years ago, some of these funds have churned out better returns than the EPF and PPF.

The outperformance of the NPS funds is chiefly because of the low charges of the scheme. The charges become critical when you are saving for the long term. Even a 0.25% difference in the charges can extrapolate into a major difference in the corpus over 25-30 years. If you invest 1 lakh a year in the NPS and your fund earns 9%, in 25 years you would have accumulated 85 lakh. However, if the charges are raised from 0.5% to 1%, the corpus will be only 78.68 lakh. Raise it further to 1.5% and the corpus deflates to 72 lakh. Mutual funds and pension plans from insurance companies charge roughly 2-2.5% a year.

On its part, the government is also trying to push investors to save more for their retirement. The 2011 budget introduced a new Section 80CCD(2). Under this, up to 10% of an employee's basic salary put in the NPS is tax-deductible. This is over and above the tax deduction under Section 80C. This means a person with an annual basic salary of 5 lakh (nearly 40,000 a month) can get an additional deduction of 50,000 if his employer puts this money on his behalf in the NPS. Assuming that he will have other income (bonus, special allowance, interest, etc), which puts him in the 20-30% tax bracket, the NPS investment under Section 80CCD(2) will reduce his tax liability by almost 10,000-15,000.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

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Tax Saving Mutual Funds Online

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Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

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1. ICICI Prudential Tax PlanInvest Online
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6. IDFC Tax Advantage (ELSS) FundInvest Online
7. SBI Magnum Tax Gain Scheme 1993Invest Online
8. Sundaram Tax SaverInvest Online
9. Edelweiss ELSS Invest Online

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