JOB HOPPING AND PF TRANSFER – TO DO OR NOT TO: POWER OF COMPOUNDING!

JOB HOPPING AND PF TRANSFER – TO DO OR NOT TO: POWER OF COMPOUNDING!

These day people hop job regularly. It is not like the good old days where you join a service and retire from the same institution. Flood of opportunities due to globalization and growing skilled population made it easy for both employers to seek a talent and employees to seek opportunities for growth. In doing all these to increase the in-hand-salary, most of us tend to forget about the Employees Provident Fund balance. There is always some big expense round the corner and we decide to withdraw the balance instead of transferring it.

This looks very simple and seemingly very unimportant transaction. But read below to understand that you are going to lose whopping wealth due to your ignorant mind.

Let us take a hypothetical example of a Vicky, who starts working when he is 25 and switches his job every three years for first 10 year and 2 times for next 10 years. After that he settles to remain with one company.  Now assume that he is going to retire when he is 60. Every time Vicky switches his job, he withdraws his EPF in first 20 years.

Let us assume that Vicky is an IT engineer and his starting basic salary is INR 180000 per year. We also assume that he gets 5% increment in basic pay every year for first twenty years and then it remains constant.

We are assuming actually EPF interest for period known and then an EPF ROI of 8.75% (Current EPF Rate) for all remaining years.

Here is how his withdrawals look: Vicky withdraws about a million rupees in total but he does not understand how much this is going to cost him.

	Employee Share	Employer Share	Total Amount Withdrawn
First Withdrawal After 3 Years	Rs.        76,942	Rs.        54,875	Rs.        131,817
Second Withdrawal After another 3 years	Rs.        89,064	Rs.        66,998	Rs.        156,061
Third Withdrawal After another 3 years	Rs.        98,187	Rs.        76,121	Rs.        174,308
Fourth Withdrawal After next 5 years	Rs.     205,909	Rs.     165,785	Rs.        371,695
Fifth withdrawal after another 5 years	Rs.     250,285	Rs.     210,161	Rs.        460,447
		Grand Total	Rs.    1,294,328

Now to understand power of compounding, look at the table below. There are two scenarios in it. First one is that Vicky does not withdraw during any of his job switches but instead Transfers the EPF balance to the new organization he joins. Due to this, he is able to carry forward his balance from previous employer with interest and top it up with the monthly contribution. The time horizon in which Vicky’s money compounds is whopping 35 years.

In the second scenario, Vicky only starts accumulating after 20 years of service as he has withdrawn on previous occasions where he switched his jobs.

Now look at how much Vicky stands to gain if he does not withdraw. This is whopping 4 times more than what he is making in the second case.

	Employee Share	Employer Share	Total
Normal Case-No Withdrawal	Rs.  7,404,064	Rs.  6,071,198	Rs.  13,475,262
First 20 years, Withdraws at every Job Switch	Rs.  1,714,451	Rs.  1,520,247	Rs.    3,234,698

Benefit to Vicky if he does not withdraw.

1. Vicky gets to compound his money for 35 years
2. Accumulates good enough money to cater for life after retirement
3. All money as per current tax laws is TAX FREE

The Message is loud and clear, ALWAYS TRANSFER YOUR EPF; IT’S FOR YOUR OWN GOOD!

Note: If you want to see the details of analysis done in excel, please feel free to drop me a note on Sudarshan.Rajhansa@gmail.com