Retirement planning for self-employed individuals
Self-employed people are more prone to ill planning, especially for retirement, as they do not have PPF or LTA to depend on. Hence, they have to start from a scratch. And in absence of the required knowledge or busy schedule, it is generally seen that self-employed individuals do not take the pain to plan for their retirement and remain dependant on their kids for their golden years. This section of ours is dedicated to many such people.india Updated: Feb 28, 2013 15:26 IST
As retirement is like entering into a dream and living it king-size, we need to be prepared in advance. Everyone will have their own dreams for their golden retirement age. It could be anything ranging from a 3-storied building to take care of your own farms, to lead a peaceful life in their farm house or travel to the popular pilgrimage.
Retirement planning for self-employed individuals is not very different from retirement planning for any other person, provided the special needs of inconsistent income and sudden outflows can be take care of.
Usually, earning span of life is between 20's and mid 50's. Keeping aside funds during this time and routing it into investments to earn better results to cope up with future exigencies is an important aspect of retirement planning.
To further particularise the situation and breaking the solution into step-wise chart, we will reach at the following points:
1.Identify you and your family needs for regular income flow.
2.Take a decision on your saving pattern and find out how much you can spare to create a retirement corpus.
3.Select the best investment tool from range of available investment instruments that return better yield over a period of time.
4.Identify the risks involved in the investment pattern, if any.
5.Ensure that your portfolio is in such a way that it is possible to make changes at regular intervals of time for better returns.
Whiling working on this, you need to take care of the following stumbling blocks:
When it comes to retirement planning, many of us hide behind some lame excuses, such as I'm too busy, it's too early/ late to think of it, let the life go on, I don't need to plan, my family will take care of me, I don't know how to plan, etc., etc.
But whatever may be your excuse, don't wait for long. As the age grows, the responsibilities and financial needs increases manifold. Unless you start early, you might find it difficult to start investing at later stages.
Most of us assume that taking a retirement plan from any insurance company is all about retirement planning. Thus, we invest a lump sum amount on annual basis in these funds and keep spending the rest of the earnings. But it does not work this way. You need to keep an eye on the fund performance and must make the alterations from time-to-time with a view to get higher returns.
Inflation poses a major problem whenever we think of sparing some of the earnings for future. It generally eats up most of our earnings, in a way that we are literally left with nothing to save.
•Sudden outflows / Medical emergencies
The medical treatments are expensive and so is the medicine. A suddenly diagnosed illness is enough to swallow the entire saving. Hence, while planning for retirement, it is important to take into account such things, so that, if something happens, you are not left with the only option of extracting money from your retirement savings. Thus, it’s important to save regularly, even small amount, and with one-goal of retirement.
•Changing Social Structure
The culture of joint family is changing. Today, an increasing number of young Indians are staying away from their families due to employment and changing lifestyles. Hence, you may not be saving considering that your children will take care of you, but they might have other plans for themselves. And you would surely don't want to come in their road to success.
Hence, you have to create a corpus to retirement, without any help from family.
•Inconsistent income flow
For self-employed individuals, the biggest challenge that comes to hinder retirement planning is the inconsistent income flow. As the income is not constant, it is more difficult for a self-employed individual to find out how much can he/ she should contribute to the retirement plan on a regular basis. The way out here is to invest either as a lump sum or invest in those plans that give you more flexibility as compared to others. Some of the examples of such plans are:
1.Monthly Income Scheme (MIS):
It is a one-time investment scheme, offered by various banks and post-office to attract investors with the lucrative interest rate. The interest rate generally ranges from 7.5-9 per cent for up to 15 lakh, for a period of five years. The banks' MIS are available for various maturity periods – from 7 days to 10 years, at different interest rates. Interest is being credited directly into the investors' savings account directly on monthly basis. However, the flip side is that the interest earned from MIS is not exempted from tax. This is to be clubbed into other sources of income. For retirement planning, it is advisable to continue investing in such schemes till the time of retirement.
2.Public Provident Fund (PPF) Scheme:
Public Provident scheme offers its investors at attractive interest rate of 8.8 per cent per annum. The deposits under PPF scheme is locked for 15 years, with a minimum cap of Rs 500 and maximum Rs 1 lakh per annum. Interest is compounded annually and payable on maturity.
3.National Savings Certificates:
National Savings Certificate are available in two variants NSC VIII Issue (5 years) and NSC IX issue. The 5-year scheme yield returns at the interest rate of 8.6 per cent per annum, whereas the 10-year scheme yield interest at the rate of 8.9 per cent. The advantage for self-employed individuals here is that they can buy the certificate at one go, whenever they have surplus, so that there will be no need to think of the regular monthly or quarterly payment structure.
4.Mutual Funds (MF):
Non-Banking financial companies are offering varieties of funds to meet the distinct needs of investors. MF investments make more sense if used along with the above-mentioned safe investment options. Mutual funds invests our contributed amount directly into debts and equities. Many mutual funds give an option for an investor to switch their allocation of funds from debt to equity and vice-versa and to redefine the percentage of allocation between the two from time-to-time. Furthermore, each company will offer two types of tax savings mutual funds, one is growth-oriented and other is dividend-driven. The dividend will be considered under tax liability, under income from other sources. These have a lock in period of 3 years. You can either redeem after completion of 3 years or continue for much longer term for better returns. Redemption amount will be exempted from tax.
5.Investing in Stocks:
There are many blue-chip companies like Infosys, SBI, ITC, BHEL, Tata Power, etc. You can choose these companies for a long-term investment. The blue-chip companies generally give nice returns over a longer period of time, say 10 years or so.
Non-Banking financial institutions offer infrastructure bonds every financial year. The collected funds are being utilized for the infrastructure projects in India and also offer competitive interest rates in the range of 8 per cent to 9 per cent. Though, the interest rates of infrastructure bonds have dropped in the recent past, but the long-term scenario looks good. Investors also get an additional tax deductions for up to Rs.20,000 u/s 80CCF, which is purely additional to Rs. 1,00,000 deduction u/s 80C.
Over the period of time, gold is also one of the investment option for anyone with minimum guaranteed returns. One can expect average returns of around 10-12 per cent per annum from gold funds.
8.Retirement or Pension Funds:
Many insurance companies offer long-term retirement or pension policies. These come along with the life insurance cover and the main purpose of these funds is to create a huge retirement corpus fund for your retirement benefits. These are basically of two types, one is purely traditional, i.e., the returns specified by the financial executive are more or less the same. Other type of policy is unit-linked, i.e., total money will be invested both in equity and debt funds. So, the returns of this kind of policy are not assured over the period of time.