Plan early to remain financially independent during the golden years of life
Plan for your old age when you are young. That’s how you remain young in your heart sans the stress of financial upkeep.
However, not many of us realise the necessity of focusing on what possibly lies beyond our energy-filled youth. The idea of retirement planning seems absurd to most as we postpone any and every opportunity to plan a safe and financially independent future.
Investing in plans that earn returns in sync with your short-term financial goals is pretty common. However, not many people invest in plans with a long-term perspective or create an investment portfolio with multiple retirement plans. If you are looking to create a corpus for your post-retirement period or planning a financially secure retired life, investing in the following plans may help. While investing you must remember that ‘Time’ is ‘Money’. This translates to “The longer you stay invested, the better will be your returns.”
Growing old is a fact that you dare not ignore. While realising this, you may consider investing in any of the following retirement plans or all of them depending on your financial requirements.
National Pension Scheme (NPS): This government-sponsored pension scheme is a must-have option for those who are not too regular with their investments. One of the benefits of investing in this scheme is that your money gets invested in equity schemes, debt instruments, and government bonds over a period. This is not a one-time investment plan but a systematic investment option wherein you may invest a particular amount at regular intervals. On retirement, you get a portion of the amount in a lump sum while the rest is converted into regular pensions. By starting early, you may grow your regular investments into a huge corpus that will free you of possible financial distress.
Investing in NPS also lets you choose from among the three asset classes - equity, debt, and government securities depending on your risk appetite. The prolonged investment horizon allows you to benefit from the increased allocation of up to 50 percent in equity investments. Though NPS subscribers working in private companies are allowed to withdraw the money after 10 years of investment, it serves best to allow this investment continues until your date of retirement. Investment towards NPS is subject to tax deduction up to Rs. 50,000 under Section 80CCD (1B) of the Income Tax Act.
Mutual Funds: Many people do not include mutual funds in their retirement planning despite the former availing high returns up to nearly 20 per cent if invested for long periods. Opt for a Systematic Investment Plan (SIP) to invest in your choice of mutual funds. This will help the investment to grow steadily while shielding you from short-term market volatility and its consequent risks. If you are also looking for a tax reprieve, investing in tax-saving mutual funds can help. With continued investments in mutual funds, you can build up a lucrative corpus over a period. There is a common tendency among many to be risk-averse while nearing the retirement age. The trick is to stay invested in equity funds in the former years of investment and gradually shifting 20 per cent of the investment every year to debt funds in the last few years of your active service.
Employee Provident Fund/Voluntary Provident Fund: Voluntary contribution by employees towards their employee provident funds is one of the most underrated retirement planning methods. As per the Employees' Provident Fund Organisation regulations, both employees and employers must contribute 12 per cent of (Basic Salary + Dearness Allowance) to the fund. However, employees may choose to contribute the entire amount (Basic Salary + Dearness Allowance) towards the Voluntary Provident Fund (VPF), which is an extension of the Employee Provident Fund (EPF). The interest earned on the VPF is the same as earned on EPF and varies between eight and nine per cent as decided by the EPFO.
Public Provident Fund: This one must-have financial instrument balance the risk-return balance in your investment portfolio. Different from the EPF, anyone and everyone in India can open a Public Provident Fund (PPF) with a bank. However, one cannot contribute more than Rs 150,000 towards the PPF. The minimum contribution towards PPF is Rs 500. The interest earned on the PPF account is somewhere between seven and eight per cent as decided by the government and is compounded on an annual basis. Classified under the Exempt- Exempt- Exempt (EEE) category, contributions towards PPF are subject to tax deduction under Section 80C of the Income Tax Act while the interest and the total corpus earned are also free from tax liability.
Pension Plans: Also called annuity plans, the idea behind buying these plans is to secure for oneself a fixed amount every month or year. Investment towards these plans can be made by making regular payments towards it monthly, quarterly, or yearly. The total investment along with the interest accrued grows to a sizeable corpus amount that may be used to buy annuity payouts post-retirement. Annuity plans in many cases are deferred while some are immediate too. Deferred annuity plans involve prolonged investment during the working tenure and then start getting paid on retirement. These plans are deemed best for salaried investors. Immediate plans work best for those who are either retired or nearing their retirement age as the payouts, fixed or variable, start immediately. Annuity plans are preferred as the payouts are guaranteed for life and are tax-free. Moreover, one can appoint a nominee to continue receiving payouts, thus, ensuring the financial security of a loved one for life. While the returns on annuity plans are not high, the guarantee of a fixed monthly income helps secure out of possible financial distress during the later years of life.
Bank Deposits: These traditional plans are underestimated owing to low-interest rates and the commonality of their schemes. However, having bank deposits including savings account, fixed deposits, and recurring deposits are a must to ensure regular investments. While fixed deposits allow you to invest in a lump sum, investing in recurring deposits allows you to invest a fixed sum at regular intervals with returns higher than savings bank accounts. However, the income earned on maturity is subject to tax as per the Income Tax Regulations.
While planning for retirement may seem a far-fetched decision by the young, planning for it from an early age is essential to remain financially independent during the golden years of life. Also, old people are vulnerable to sicknesses. Hence, it makes sense to have enough money in hand to pay for medical expenses as many health insurance firms do not sell insurance products that cater to old people.
The author is a Journalist and a Blogger