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Amount Withdrawn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.
- Vicky gets to
compound his money for 35 years
- Accumulates good
enough money to cater for life after retirement
- 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
Excellent article, very informative with example. Help to take wiser decision.
ReplyDeleteThank you!!
ReplyDeleteVery well written and explained in an easier way.
ReplyDeleteLooking forward to more posts regularly.
Good One Sudarshan Keep it up...
ReplyDeleteRegards
Veerendra Kothekar
Good One Sudarshan Keep it up...
ReplyDeleteRegards
Veerendra Kothekar
Thank you
ReplyDeleteVery informative and useful Sudharshan , Good one
ReplyDelete