Retirement planning: Vishal Dhawan of Plan Ahead Wealth Advisors tells you how to go about it

EPF is not enough to create a retirement corpus, according to Vishal Dhawan, founder and CEO of Plan Ahead Wealth Advisors.

When planning finances for the sunset years, it is wise to do the math to determine how much money would be needed, and for how long. Thereafter, look at the various options available and make a robust portfolio exclusively for retirement.

In an interview with Money9, Dhawan articulates a step-by-step approach.

• Do the math

While planning for retirement, crunch the numbers as per needs and not wants. Dhawan calls these ‘fixed’ and ‘discretionary’ expenses. Basic necessities like food, clothing and rental qualify as needs, while travel, entertainment and shopping may be classified as ‘discretionary’ – you may choose to not expend.

For a 35-year-old planning retirement at 60, there are only 25 years left to save enough for post-retirement. If one were to consider a life-span of 80, then there are 25 years left to plan for 20 years of post-retirement needs.

A simple present day expenses of fifty thousand rupees a month on needs today will mean a corpus of 1.2 crore rupees for the golden years. Now add inflation to it and the number goes much higher.

This is pure need and not desires or wants. So starting early is crucial.

• Start early

Instead of 35, if an individual starts planning at 25, then there’s additional 10 years to build the same corpus. But if you start at 45, only 15 years are left to build the same kitty.

The key is starting early.

• Provident Fund is not enough

Dhawan suggests that EPF should ideally comprise only 30-50% of your retirement corpus. While planning finances, other investment tools need to be considered. An additional voluntary provident fund (VPF) contribution is a safe option, but may not be able to beat inflation.

“The challenge with most fixed income options, including VPF is that they are unlikely to beat inflation. And therefore, what you want to do is have some assets that beat inflation, for example, equities bought through index mutual funds or through diversified multi-cap funds or flexi-cap funds. So, you have to diversity your portfolio to have some provident funds and some equity investment,” said Dhawan.

• Add National Pension Scheme in retirement portfolio

“In the case of NPS, you can actually create a portfolio which has much more equity exposure. Over long periods of time, equity as an asset class can actually do quite well and beat inflation, even though it’s very volatile in the short run. So we think the NPS is a good option. It ensures that you save a portion of that money dedicatedly for retirement, and you don’t end up pulling that money out just because you had a short term need which came up all of a sudden,” said Dhawan.

• Retirement corpus is not an emergency fund!

Treating the retirement corpus as an emergency fund is a mistake that many people commit, said Dhawan.

The provision to withdraw money from Provident Fund for a child’s education or home renovation propels many to liquidate.

“We find many people use that as an opportunity to actually dip into their retirement savings when they should completely avoid it,” he said.