Retirement in India

The arithmetic nobody enjoys

Suppose you spend ₹60,000 a month today, you are 32, and you plan to retire at 60. At 6% inflation, that ₹60,000 of lifestyle costs roughly ₹3,05,000 a month by the time you stop working, the same life, at a much larger number.

Now that has to be funded for perhaps twenty-five years, during which it keeps inflating. The corpus required runs into several crore. This is the point at which most people discover their existing plan is a fraction of what is needed.

Run your own figures with the retirement calculator rather than taking the example on trust. The number is usually larger than expected, and it is much better to discover that at 32 than at 55.

EPF

For salaried employees, the Employees' Provident Fund is usually the foundation, and often the only retirement asset that exists by default. Both employee and employer contribute a percentage of basic salary, and the fund earns a rate declared annually by the government.

What it does well: it is compulsory, which defeats procrastination; it is government-backed; and the returns have historically been reasonable for a debt instrument with favourable tax treatment.

Where it falls short: it is essentially a debt product. Over a thirty-year horizon a portfolio that is entirely debt is very likely to underperform one with meaningful equity exposure, and it may struggle to beat inflation by a wide enough margin to build the corpus required.

The most damaging EPF habit is withdrawing it when changing jobs. Transferring the balance preserves decades of compounding; withdrawing ₹4,00,000 at 30 to fund something else can cost a great deal more than that by 60.

NPS

The National Pension System is a market-linked retirement account with a choice of equity, corporate debt and government securities exposure, and very low management charges, among the cheapest retirement products available anywhere.

The trade-offs are real:

• Money is locked until retirement age, with limited exceptions.
• At maturity, a portion must be used to purchase an annuity, and Indian annuity rates have historically been unexciting.
• Equity allocation is capped, so it is less aggressive than a pure equity fund.

NPS suits money you are certain is for retirement and nothing else. The additional deduction available under section 80CCD(1B) is a genuine benefit, but the lock-in and annuity requirement mean it should be a component of a plan, not the whole of it.

Mutual funds: the flexible layer

Equity mutual funds have no lock-in beyond ELSS, no annuity requirement, and no cap on equity allocation. They are also fully exposed to market risk and guarantee nothing.

For a long accumulation phase this flexibility is valuable. It lets you hold a higher equity allocation while young, reduce it deliberately as retirement approaches, and access the money if life takes an unexpected turn.

A common structure is EPF as the stable base, NPS for the tax-advantaged retirement-only portion, and equity mutual funds providing the growth and flexibility. The proportions depend on your age, income stability and capacity for volatility.

Reducing risk as you approach

A portfolio that is 80% equity at 35 should not still be 80% equity at 58. As the date approaches, the ability to wait out a bad market disappears, and with it the justification for holding so much equity.

The mechanism matters less than having one. Some people reduce equity by a fixed percentage each year; others shift in steps at 50, 55 and 58. What is important is that the rule is decided in advance, in writing, rather than in reaction to whatever the market is doing at the time.

The part people skip: drawdown

Almost all retirement discussion concerns accumulation. Withdrawing is a distinct problem with distinct risks.

Sequence-of-returns risk is the main one. During accumulation the order of returns does not affect the final value. During withdrawal it dominates: a severe fall in the first few years, while you are selling units to live on, can permanently damage a corpus that would otherwise have lasted. Two retirees with the same average return can reach very different outcomes based purely on when the bad years arrived. This is covered further in understanding market risk.

The standard defence is a cash buffer of two to three years of expenses held outside equity, so that a falling market never forces a sale. Spend from the buffer during downturns, refill it in good years.

Healthcare is the second. Medical costs rise faster than general inflation and arrive precisely when income has stopped. Health insurance that continues into retirement is not optional, and it is dramatically cheaper to arrange before a diagnosis makes it difficult.

Five expensive mistakes

1. Starting late. The first decade of contributions does more work than the last, because it compounds longest. Beginning at 30 rather than 40 can roughly double the outcome for the same monthly amount.
2. Withdrawing EPF between jobs. Transfer it. Almost always.
3. Assuming children will provide. They may. Building a plan that requires it places a burden on them and removes your own optionality.
4. Treating property as the plan. A house you live in generates no income. Selling it in retirement means finding somewhere else to live, and property is illiquid at exactly the wrong moments.
5. Ignoring inflation. "₹2 crore sounds like plenty" is a statement about today's prices, not the prices you will face at 75.