Retirement spending -use PPF intelligently

In the cyber world feedback is instantaneous. Within hours of writing my post on how the retirement corpus could be much lower than what people normally think, two of my friends called me. One was excited that his current investments were much ahead of the number I had stated, while his expenses were in line with my post. The other expressed doubts whether 40 lacs in PPF would go a long way for retirement usage.

Well the proof of the pudding is in the eating, so I decided to do a basic spreadsheet on it. This is something I normally do not do – after all, if you are clear about something fundamentally then where is the need to prove the obvious? However, the assumptions and results are as follows:-

• With a starting amount of 40 lacs, deposit of 1.5 lacs for 10 years and withdrawal of 4 lacs every year for 10 years you will still have 50 lacs at the end of 10th year.
• In the second decade you can withdraw 6 lacs every year without any deposits and still be left with 21 lacs at the end of 20th year.
• Note that all withdrawals are tax free and you will get 80 C benefits on the deposits for the first 10 years.
• Interest rate assumed is 8 %, which is probably what it will average out as over the years. Conservative investors can use 7 %.

The bottom line is this – using PPF in an intelligent manner will stretch your money as well as make it tax free which is an ideal combination. The other key idea is to let your equity grow till the third decade of your retirement. You may well need great amounts of money for long term care, should you survive beyond 80 years and equity is the best bet.

So, no matter whether you are just starting out, are in your thirties and do not have a PPF account or have one which is kind of dormant, you must fully fund your PPF account. It will be a hedge in times when you do not want to redeem equity for your goals and it will also serve as a great tool for retirement planning when the time comes.

Many people confuse PPF with equity investments which is comparing apples and oranges. You do need equity in your portfolio but PPF is clearly the best debt instrument available which must be your first choice. Look at debt MF etc only after you exhaust your PPF contribution – preferably for both you and your spouse.

You will be glad in your retirement years that you took this seemingly dull but eminently sensible approach.