An aging population emphasizes urgency of retirement planning

According to the latest Census Report of 2022, about 30% of Bangladesh’s population is aged 40 and above. This number was approximately 25% in 2011 and 20% in 2001. This trend means we are catching up with the developing world when it comes to an aging population. An increase in living standards, family planning, healthcare, nutrition, and changes in social dynamics mean two things for us: 1. Drastic reduction in birth-rate and 2. High life expectancy. Given the economic and societal challenges we faced in the previous decades, these should be felt as a welcome change.

Only it is not so simple. Our social security is not yet well equipped to tackle this aging population in the coming years. And with the current trend, we will see the complications of an aging population in our lifetime.?With that, retirement and pensions will emerge as a big issue. Bangladesh is about to start a universal pension plan but the benefits from this will take years to materialize. The developed world has faced major fiscal problems from this issue, which cautions us as to what impact it might bring on to us.

But one of the better ways for individuals to deal with retirement is to start saving for a nest egg early on and benefit from compounded returns. Long-term compounding is likely to be the only protection against economic, market, and geopolitical volatility. Today we discuss some of the ways one can save?money, grow wealth, and prepare for one’s retirement. For this topic, we will stick only to the options available to someone residing in Bangladesh.?

NSC:

National Savings Certificate (NSC) is probably the most popular option for investment in Bangladesh. The Government of Bangladesh runs this scheme, so it is as safe as they come. The interest rate is about 9% based on the investment amount, which is higher than what bank FDRs can give. And on the interest income, the tax rate is exceptionally low at only 10%. On top of it, the entire amount of investment in a certain year makes the investor eligible for a tax rebate. The only caveat is that there is a limit of 30 Lakh (individuals) and 60 Lakh (joint accounts) taka for investment. So once that ceiling is reached, one must find other methods for investing.

FDR:

One of the most common money market investment vehicles, it stands for Fixed Deposit Receipts. FDRs are probably the most common savings tool when one has excess money. Currently, the banks are offering a return of 7-7.5% on FDRs. However, they do not provide any tax benefits. There is a Tax Deducted at Source (TDS) of 10% (If ETIN is provided) or 15% (If ETIN is not Provided) on FDR interest, and the total tax on it can go up further based on the tax bracket. FDRs do not offer any tax rebate. Their pros are that the capital is protected in a stable bank. But capital is not accessible without taking a sizeable penalty in the case of emergencies, premature encashment will result in a loss of interest income.

DPS:

DPS stands for Deposit Pension Scheme. This is a good option when someone wants to save periodically (monthly, quarterly etc.). One can pay periodically as little as BDT 500. And up to BDT 60,000 goes towards allowable investment and thus up to BDT 9,000 tax rebate. This makes it a good tax and wealth optimization tool for people who are very conservative in investing. Various stable banks offer about 7.5% on 5 years DPS and up to 8% for 10 years DPS.

Real Estate:

The list will not be complete without the most popular asset class in the country. However, the issue with real estate is that it bears idiosyncratic risk, meaning the risks are unique to each property based on its location, ownership, and management structure. Another issue is lack of liquidity, meaning it cannot be sold off quickly without taking a significant loss. Also, real estate investors must commit a substantial portion of their wealth to it. According to our research, return on real estate (rental yield) is usually under 3%.?Other issues may include maintenance and depreciation cost.

Govt. Securities (T-Bills and T-Bonds):

These are debt securities issued by Bangladesh Bank on behalf of the Government of Bangladesh. These instruments are offering interest rates of about 7.5-8% at present. And they are also included in allowable investment. Hence there is a tax rebate. But the biggest issue is that the initial investment required for this is too high (BDT 1 Lakh), and it requires highly professional skills to analyse and invest in these instruments making it better for institutional investors.

Mutual Funds:??

Mutual funds are less explored in Bangladesh, making it a hidden gem. Investing in Mutual funds that invest in blue-chip (another way of saying ‘good’) stocks is expected to generate 10-12% per year. Dividends from mutual funds are tax deductible up to BDT 25,000. And on top of that, the investment is considered an allowable investment under the tax law, meaning the investor will get a tax rebate based on the investment amount. However, there is regular market risk involved as with any capital market investment. Over the long horizon, top mutual funds generate returns that far outperform any other modes of savings.?And because most of the open-ended mutual funds are liquid, there is no direct or indirect penalty for encashment. In the long run these investments provide good protection against inflation.

Note: We at Green Delta Dragon are launching our Enhanced Blue Chip Growth Fund (EBCGF). This fund is customized with retirement needs in mind.?We only invest in big companies, have good governance, and follow?ESG (Environmental, Social, and Governance) screening. This ensures that the risks are minimized compared to the broader capital market.