Think twice before dipping into EPF

Understand the enormity of post-retirement challenges and prepare early for other goals

This is one monthly investment that needs no pushing or prodding, given that it is mandatory. The plain-vanilla Employees’ Provident Fund (EPF) has perhaps been one mechanical debt SIP that people of all hues have readily invested in, to provide for their silver years. Indeed, for Indians prone to looking for tax benefits and safety in all their investments, EPF not only scores on both the counts, but also delivers on another important third aspect — returns.

The Employees’ Provident Fund Organisation (EPFO) has also constantly increased the liquidity factor over the years, and you can now withdraw 50-90 per cent of your accumulated amount for various contingencies, if you have been a contributor for 5-10 years. Of course, a few conditions apply. Financial planners have argued that allowing early withdrawal could jeopardise retirement goals, given that PF is likely to be the single-largest really long-term investment for most people.

But savers would counter this argument with: ‘What use is money if it is not available when I need it the most?’

Curbing or preventing premature withdrawals from PF may not be entirely possible, given the emotional overtones involved.

But if you realise what you would miss by not remaining invested till you retire and understand the enormity of post-retirement challenges, you can minimise the need for dipping into your PF balance.

Even if you need to draw from your accumulated corpus, you can do it smartly by planning it in such a way that the balance can be replenished.

A major retirement vehicle

Data from mutual fund industry body AMFI (Association of Mutual Funds of India), throw up interesting points on how long investors stay with equity funds — the most recommended instrument for saving towards long-term goals.

According to AMFI, as of March 2018, only 30.4 per cent of the mutual fund industry’s equity assets remain invested for a period of more than two years.

Worse, a little more than half the equity assets are sold within a year!

Clearly, the Indian investor is not looking to stick on for long — 7-10 years — which is typically the recommended time-frame for generating above-average returns.

The average ticket size — the asset size per account — in the case of equity schemes is only about ₹1.55 lakh.

Therefore, the average saver appears to have neither the risk appetite nor the financial comfort to stomach the volatilities of the equity markets.

The short point is that PF is the major or, in many cases, the only retirement savings vehicle for the average non-pensioned saver — all the more reason not to dip into it early.

The retirement challenge

While paying for your new home from your PF balance may seem satisfying, it does raise concerns about your retirement goal.

According to data from World Bank, the average life expectancy in India was is 69 years, as of 2016. With every passing decade, the average lifespan is increasing by five years, thanks to better medical facilities and health-related awareness.

With a long post-retirement life of 15-25 years (or more), you should not find yourself in an ‘asset-rich, cash-light’ scenario.

One less-highlighted aspect is about how returns from EPF have been superior to market-linked debt investments of all hues.

In the past 10 years, debt funds across categories — long and short durations, gilt, credit risk and dynamic bond — have managed 7-8 per cent returns (pre-tax).

The PF interest rate, on the other hand, has been 8.25-8.75 per cent (it was 9.5 per cent in 2010-11). And those who have been working for the last 20-plus years would have also earned double-digit returns on their PF contributions in the 90s and early part of the last decade. If tax deductions under Section 80C are considered, the returns would be in double digits for those in the higher brackets. And the final corpus is tax-free during withdrawal.

Sum and substance: there aren’t too many debt products that match PF’s attractiveness with a combination of safety, liquidity and returns — reason enough for you to stay put.

Withdrawing strategically

If you must withdraw, keep these points in mind to minimise the erosion in your retirement corpus. In case you wish to withdraw for a large goal such as buying a house, do so at least 10-15 years before retirement. That way, you will have enough time to replenish a good part of what you take out. Next, dip into your PF kitty for buying a house only if you intend to live in it and not for renting it out or as an investment. Avoid withdrawing from your PF when you shift jobs.

A medical policy for you and dependents must be taken as early as possible in your career, so that you can stay prepared for any emergency. Taking a term policy to cover all your liabilities is another important step. Building an emergency fund, over time, to the tune of six months’ expenses, is another necessary move that must be made.

For education and weddings, ideally, you must start planning as soon as you have a child. If you are averse to equity funds, have very little surplus, or are completely against taking market risks, you can at least increase your EPF contribution (called voluntary PF or VPF).

This additional contribution also enjoys tax benefits and the same interest rate as the EPF. That way, even if you withdraw, your corpus won’t be eroded substantially.

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