Retirement Planning for Self-Employed Individuals

Last Updated: 16 Dec 2024

Planning for retirement can be challenging, especially for self-employed individuals who lack employer-sponsored plans. Creating a personalised retirement strategy is crucial for long-term financial security. This article outlines the best self-employed retirement plans, highlighting their benefits, drawbacks, and tax advantages, helping you choose the right option for a secure and comfortable retirement.

Why should I plan for my retirement?

Increasing Retirement Ages

As average life expectancy in India rises, it has become more vital to plan for a longer retirement. Life expectancy data reveal how long the average person lives. In India, a person aged 60 has an average life expectancy of 18.02 years. This means that the average Indian lives till the age of 78. As a result, you must begin planning ahead of time in order to maintain your lifestyle and cover other expenses over such an extended period of time.

Medical Expenses

Unexpected medical bills are a frequent source of concern as people get older. Rising medical bills are tough to handle unless you plan ahead of time.

Financial Independence after Retirement

You want to live your life on your own terms after retirement. However, over 65% of those over 60 rely on others for their daily expenses. This demonstrates how crucial it is to plan for retirement and achieve financial independence.

Benefits of Retirement Plans:

The earlier you invest in a retirement plan, the longer your money can grow. Additionally, the interest gained over time is reinvested to create higher returns. This is known as the power of compounding. This gives you a larger sum for retirement.

Safety Net Against Unexpected Events

Retirement plans ensure that you are financially prepared in the event of an emergency. They also provide financial support in cases of critical illnesses or permanent incapacity as a result of an accident.

Guaranteed Regular Income for Life

Retirement plans provide you and your spouse with a regular pension for the rest of your lives.

Security for Your Children in Your Absence

In the event that you and your spouse are not present, your children may get a lump-sum payment under some retirement plans. This allows you to leave behind a legacy for your children.

Tax Benefits U/S 80CCC and 10 (10A)

In addition to a pleasant retirement, you can receive tax benefits on premiums paid up to ₹1.5 lakh.

How much should I save for retirement?

When you retire, your regular income ends. However, even in retirement, you will want to maintain your current lifestyle and be able to support your family. Furthermore, medical costs may rise. As a result, it is critical to determine your retirement financial needs ahead of time so that you can plan accordingly. It is impossible to calculate the precise amount you will require post-retirement; nonetheless, the following are a few elements to consider while calculating the amount:

Your Daily Expenses

This will give you an idea of how much money you would need to maintain your current lifestyle even after retirement.

Events and Milestones During Retirement

Even in retirement, financial obligations may arise, such as paying for children’s higher education or weddings, among other things. It is vital to include these fees while budgeting for retirement.

Your Post-Retirement Dreams

You may have ambitions of traveling, starting your own business, and other things that you want to accomplish after retirement. These would demand a large amount, so it is vital to include them while calculating the amount you would need upon retirement.

Unexpected Costs

While planning for retirement, you should set aside some amount for any uncertainty, such as medical bills or financial emergencies.

Inflation

Inflation raises the cost of products and services, requiring you to pay more to consume the same commodities and services in the future. For instance, if your current spending is ₹6 lakh per year at 45, maintaining the same lifestyle after retirement would demand ₹14.38 lakh per year at 60, assuming 6% annual inflation. As a result, while determining the amount you will need for retirement, inflation must also be considered.

Power of Compounding

If you begin saving early, your money will have more time to grow. Investing ₹1.5 lakh per year at the age of 45 can result in retirement savings of ₹44 lakh at 8% or ₹31 lakh at 4% by the age of 60. If you started saving the same amount at 40, your retirement savings at 60 would be ₹74 lakh at an 8% interest rate and ₹46 lakh at 4%.

Increasing Inflation

After retirement, you’ll need a consistent income to cover your costs. The later you start saving for retirement, the more you will have to save. Inflation can increase monthly spending from ₹35,000 at 30 to ₹2.66 lakh by 60. To cover these expenses, make a monthly payment of ₹27,000. Delaying savings by just five years can result in a monthly rise of ₹42,500.

What are the Procedures for Purchasing a Retirement Plan?

The following are the key steps for purchasing a retirement plan:

Define Your Goals

You want to maintain financial independence even after you retire. You want to maintain your existing lifestyle, pay medical expenditures, and achieve your post-retirement ambitions, such as purchasing a home, travelling, pursuing a hobby, establishing a new business, and so on. Defining your goals for retirement will help you plan accordingly.

Calculate the Amount You Will Need

Based on the goals you wish to achieve during your retirement, you must evaluate the amount of money required to accomplish them. It is critical to consider inflation in this computation. Knowing the amount that you will require can help you calculate the amount that you need to invest now to reach your retirement goals.

Choose a Retirement Plan

Look for a plan that will give you a fixed income in retirement. The income should be sufficient to allow you to comfortably pursue your post-retirement aspirations. Check to see if your retirement plan allows you to invest monthly, semi-annually, annually, or all at once, whatever is more convenient for you. You may also desire options like purchase price return at maturity, coverage for your spouse, and more. Select a plan that fits your requirements.

Purchases can be done either online or offline. You must submit appropriate documents such as proof of identity and address, as well as proof of income. Also, based on your retirement plan, you will need to pay your premiums monthly, semiannually, annually, or all at once.

How Do I Select a Pension Plan?

It is critical to have enough money to ensure financial independence during your golden years. Based on your post-retirement objectives and goals, you may require funds in the form of a lump amount, a regular income, or both. Understanding the following characteristics will help you select the best pension plan for your needs.

Returns from the Plan

It is best to look for plans that yield better profits. A plan that you invest in should give significant returns and be able to cover your expenses after retirement.

Guaranteed Pension

The risk appetite lowers with age. For your retirement, you may want to consider investing in a plan that offers guaranteed returns free of market swings. This will help ensure that your post-retirement objectives are met, no matter what. Some plans provide a guaranteed pension not just to the policyholder but also to their spouse in the event of an unfortunate event. These plans guarantee financial freedom for you and your loved ones.

Flexibility

As you approach retirement, you may wish to accomplish more than you intended when you purchased the pension plan. This may necessitate increasing your investment in the plan. Look for a plan that allows you to enhance your premium contribution with top-ups. Look for features. like flexibility in paying premiums (monthly, semi-annually, annually), different payment alternatives, and more.

Bonus and Other Advantages

Most retirement programs provide incentives and benefits for remaining invested. These incentives and advantages you receive over time will increase the plan’s returns and give you a greater retirement fund. As a result, it is always wise to choose a plan that offers these benefits.