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5 Steps Self-Employed Should Take To Prepare For Retirement

The self-employed need to properly plan for their retirement, as they usually do not have the cushion of a regular income and an Employees’ Provident Fund. Here are five steps they need to take to prepare for their retirement

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Outlook Money
January 2, 2024
Self-Employed

Self-Employed

When it comes to planning for one’s retirement, the salaried have options, such as the Employees’ Provident Fund (EPF) and the National Pension System (NPS), besides other equity and debt instruments that can help them build a decent corpus for their retirement years. These two instruments help them invest in their long-term retirement goals in a disciplined manner. Here are the 5 Steps Self-Employed Should Take To Prepare For Retirement and Build Their Retirement Corpus.

Incidentally, NPS is one instrument along with the Public Provident Fund (PPF) that the self-employed can also invest in building their retirement corpus. But more than the investment tools, retirement involves careful strategy and planning.

Assessment of Personal Needs: Everybody has unique needs, which are crucial to evaluate, and it is more so for self-employed individuals.

Some of the factors they should consider are the number of family members, the number of earning members of the family, the working domain, and when they can retire from work.

If the family is nuclear and includes children of the same age, there may be school and/or college tuition costs that need to be taken into account. So, it is advisable to either create separate funds for each member of the family or include them in your own retirement/pension plan if you are the only provider and the family has a large number of dependents, including parents and children.

One also needs to take into consideration the type of business one is involved in. Businesses, such as general stores, confectionery shops, restaurants, clothes retail, and boutiques are typically proprietorships and may require a long duration of involvement, which could prolong one’s retirement planning.

Also Read: 5 Things Seniors Should Include In Their Financial Checklist For 2024

Setting Pension Goals: After assessing your requirements, set goals for retirement based on your assessments. Take all minor to major factors into account before making a decision, and do not leave anything to chance.

Tuition fees, health conditions such as diabetes, or emergencies that arise can delay your retirement age, and if have already retired early, could put a strain on your retirement corpus. In such a scenario, the goal you set for your retirement could fall short. So, it is important to break down your retirement planning into smaller baskets and earmark them for individual goals. This way, you will be able to work out a more realistic corpus for your retirement.

Seek Advice: As self-employed people usually do not have access to information and resources that salaried employees have when it comes to planning for retirement, it is advisable to seek professional advice from a registered investment advisor.

A professional advisor can help you plan where and how much you can invest in accordance with your risk-taking capacity. They can guide you on whether you should put your money in a bank fixed deposit (FD) or in some other asset class, such as equity, real estate, or gold. Retirement planning is a difficult task but even more difficult for the self-employed as they need to precisely choose the right instrument in accordance with their goals, and do not have the cushion of a regular income every month and an EPF for building a retirement corpus that salaried employees enjoy.

Choosing a Suitable Pension Plan: As a self-employed individual, one can choose between NPS and PPF to build a suitable retirement corpus from which they can withdraw a regular pension amount in their retirement years. PPF is a government scheme that provides EEE benefits (exempt, exempt, exempt) in which the investment (under the old tax regime), interest-earning, and maturity proceeds are tax-free. The NPS allows one to choose the investment option (equity or debt), and allows for 60 percent of the maturity proceeds to be withdrawn as a lump sum (tax-free), while the balance has to be used for buying an annuity, which is taxable.

Health Plan: Illnesses can severely impact one’s financial planning, especially if there are seniors with critical illnesses in your family. So, a health insurance policy that covers critical illness and check-ups is essential. Also, try to get health insurance early in your life so that any disease that you get later in life gets covered after the waiting period.

Remember that a health plan is one of the most important things for a retiree. An insurance plan that covers your critical or life-long illness such as arthritis that could require monthly check-ups or diabetes, which requires expensive insulin injections and medicines or a blood pressure kit is crucial to cut down on additional costs, as the cash flow is comparatively less in one’s retirement years. A plan that also provides treatment to a dependent, such as spouse, children or parent is always recommended to avoid separate plan which requires two premiums. A floater policy can help you avoid that.

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