How to create ONE CRORE Rupees from EPF? Sounds interesting right? Let us see whether it is possible or not as EPF Is the most ignored investment for many salaried.
Many of us know the power of compounding and also the majority of the salaried are EPF members. Unknowingly they are contributing to EPF as it is deducted from your salary before you get in hand.
What is EPF or Employee Provident Fund Scheme?
I have written a lot of posts on EPF. However, to simplify how you and your employer contribution will work in this EPF structure, let me share the below image for your reference.
I hope you got a clear idea of how the EPF deduction from your salary and employer contribution is deducted on a monthly basis and get invested.
If you wish to look at the current interest rate or historical interest rates, then refer to my latest post “EPF Interest Rate 2019 – 2020 – Historical interest rates from 1952 to 2019“.
How to create ONE CRORE Rupees from EPF?
Let us move on and understand to create one crore rupees from EPF when you retire. For the accumulation of Rs.1 Crore calculation, I have assumed as below.
Your Salary (Basic+DA)-Rs.20,000 per month, Rate of Interest on EPF-8.5%, your age-25 years (assuming you retire at 55 years of age) and hence you are contributing around 30 years towards EPF, assuming your salary (Basic+DA) increment at 5% yearly. Also, I have assumed that you and your employer are contributing 12% of your salary (Basic+DA) and assumed that you have no prior EPF account (Balance).
If we do this, then we may tabulate the same as below.
If we draw the graph of this EPF accumulation, then it looks like below.
You noticed that for the first 5 years period, you never experience the compounding effect. From 6th to 10 years onwards a slight visibility. However, post 10 years, it is zooming and touching the Rs.1 Cr mark after 30 years.
Conclusion:- You noticed the power of compounding here. It creates the wonder to your wealth creation IF you hold your investments for the long term. Investing for a few years and expecting a compounding effect is MYTH.
Never touch your EPF accumulated corpus unnecessarily like withdrawing when you change the job or withdrawing for house contruction or any other purposes. Let it slowly build your solid retirement corpus. More than that, this retirement corpus is TAX-FREE as of now. Hence, consider EPF as your BEST debt component of retirement funding.
I know that EPF interest rate changes on yearly basis and also, the time horizon to retirement differs from person to person. However, you can still easily accumulate Rs.1 Crore from EPF by increasing your contribution to EPF through VPF. But do remember that EPF is illiquid investment where the liquidity is possible with certain restriction. Hence, use the EPF as certain portion of your debt portfolio of retirement funding.
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