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Relying on small savings for your retirement? Think again.

The withdrawal of the circular, on small savings scheme interest rates, on March 31 brought a lot of cheer but, we cannot ignore that small savings rates have been falling for nearly two decades now.

The Government issued and withdrew a circular on lower small savings rate within a day. The circular which was withdrawn came with 0.4%-0.9% cuts in small savings right from PPF to Senior Citizens Savings Scheme to Sukanya Samriddhi Account Scheme. This circular was quickly withdrawn with the Finance Minister sighting the rate reductions as an oversight. 

The withdrawal of the circular brought a lot of cheer but, we cannot ignore that small savings rates have been falling for nearly two decades now. With interest rates in the economy at a low and the Government trying to lower its rising fiscal deficit, we cannot expect small savings rate to remain detached from the current economic reality for long. Relying on this for your retirement kitty isn’t the wisest option.  

Sample this; your PPF account contributions in 2003 would have earned you a return of 10% a year or thereabouts, today your contribution will earn you around 7.1% a year. If the rate reduction had stayed, then your next PPF contribution would earn you 6.4% a year. 

So far, small savings have been seen as the retirement messiah for many. However, with rates falling and inflation remaining elevated, you need to rethink this strategy.

Other than PPF, where interest income is not taxed, other small savings interest are subject to tax. Now that interest from EPF contributions is also partially taxable, you will have to use alternative asset choices for building your retirement kitty. 

Your retirement allocation

If you are looking to grow and build your wealth for retirement and still have a decade or more to go, you cannot afford to ignore adding exposure to equity assets. This will not only help you gain from the benefit of compounding returns over long periods but also historically, equity returns have been seen to beat inflation and thus record real growth in money. This is especially true for a growing economy like India’s where inflation remains consistently high.

So far, small savings have been seen as the retirement messiah for many. However, with rates falling and inflation remaining elevated, you need to rethink this strategy.

Even post-retirement, there is no necessity to shift all your savings out of equity to fixed-income investments. Once your regular income needs have been addressed, do keep some allocation to equity in order to keep your money growing. You are likely to have a good long life across 25-30 years post-retirement.

To maintain your lifestyle through that time you will need your money to grow with the help of growth assets like equity. 

There was a time when many did not have easy access to market-linked growth assets like equity, but technology has ensured that’s no longer the case. You can grow your retirement pool at a rate of growth higher than inflation very simply by investing online in assets like equity and holding for over a decade. 

As interest rates move lower and inflation remains persistent, it’s time for us to move away from the lure of Government guarantee and embrace the inflation-beating experience of growth assets. 

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