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7 Important Things To Keep In Mind While Planning For Your Golden Years

Retirement planning is a long-term goal and has to be tailor-made for each individual in accordance with his/her financial goals. Here are seven important things, such as contribution to VPF, PPF, buying health and life insurance early on to factoring in inflation, among others that you should consider while planning for your retirement

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Outlook Money
January 11, 2024
Changes In Personal Finance

Changes In Personal Finance

Retirement planning is a long-term goal and has to be tailor-made for each individual in accordance with his/her financial goals, such as the time left for retirement, existing and future liabilities in the form of loans, children’s education expenses, the number of dependents, and any future health emergency, among others. But here are a 7 Important Things To Keep In Mind While Retirement Planning.

Contribution To Voluntary Provident Fund

If you are unable to fully avail of the exemption limit of Rs 1.5 lakh available under Section 80C of the Income-tax Act, 1961 under the old tax regime and want to contribute more to your provident fund, you may do so through the Voluntary Provident Fund (VPF) scheme.

Technically, both the employee and employer contribute 12 percent of the employee’s basic salary and dearness allowance to the Employees’ Provident Fund Organisation (EPFO). The employee’s full contribution goes towards the Employees’ Provident Fund (EPF), whereas the employer’s contribution is divided between EPF and EPS (Employees’ Pension Scheme) in the ratio of 3.67 percent and 8.33 percent, respectively.

In VPF, salaried individuals can contribute up to 100 percent of their basic salary and dearness allowance beyond the EPF limit. The rate of interest is the same as in the case of EPF, i.e., 8.15 percent. This also comes under the EEE category, i.e., the investment, interest, and maturity are tax-exempt.

Do note that contribution to VPF is also tax-exempt up to Rs 1.5 lakh under the overall limit of Section 80C. This will allow you to contribute more towards your retirement kitty through a secure debt investment that is completely tax-exempt.

Contribution To Public Provident Fund, National Pension System

In case you are not salaried, you may consider creating a provident fund corpus for yourself through the Public Provident Fund (PPF). Even salaried employees can open a PPF account.

PPF comes with a lock-in period of 15 years and is currently offering a rate of interest of 7.1 percent. The minimum and maximum investment allowed in a year is Rs 500 and Rs 1.5 lakh, respectively. This also comes under the EEE category and is tax-exempt up to contributions of Rs 1.5 lakh per annum under the overall limit of Rs 1.5 lakh under Section 80C. This offers partial withdrawal after five years. One can extend a PPF account by a block of five years for an infinite number of times after the 15-year maturity period.

Alternatively, you may also consider investing in the National Pension System (NPS). This government-backed market-linked pension scheme allows for a minimum investment of Rs 1,000 per annum for tier-I accounts and up to the age of 60 years. Upon maturity, 60 percent of the corpus can be withdrawn tax-free as a lump sum and 40 percent has to be utilized towards buying an annuity for pension income, which is taxable.

NPS offers a tax benefit of Rs 1.5 lakh under Section 80CCD (1) within the overall limit of Section 80CCE and a further tax exemption of Rs 50,000 per annum (tier I) under Section 80CCD (1B), the maturity proceeds from NPS are not fully tax exempt.

Also Read: Here Are 7 Debt-Relief Options To Organise Your Finances

Withdrawing From EPF/PPF/VPF, NPS Before Retirement

Withdrawing from your EPF, VPF, PPF, and/or NPS before your retirement and/or maturity can diminish your corpus and rob it of further growth. Instead, you may consider liquidating some of your other personal short-term investments to tide over any emergency cash requirement.

Buying Health And Life Insurance Early

It is advisable that you buy health insurance early in your career. Not only will you save by way of premium, which tends to rise as one ages, but it will also ensure that you have less pre-existing diseases and the ones that you might get later will also get covered after the waiting period is over.

If you have family or dependents, such as parents, go for a floater health insurance policy along with cover for critical illness and check-ups. Do note that some life-long illnesses require monthly check-ups or medication.

The same goes with life insurance too. Get a pure term life insurance with insurance cover at least 10 times your income.

Having An Emergency Fund

Set up a dedicated emergency fund that covers your mandatory expenses, such as food, rent, equated monthly installments (EMIs) on home loans, car loans or any other loan, children’s education, insurance premiums local commute, and so on. This should be at least 6-8 months or a year of your mandatory expenses.

In the absence of an emergency fund, you might have to tap into your other long-term investments to tide over your financial crisis. Make sure you have this in your old age, too.

Calculating Retirement Corpus

The earlier you retire, the bigger the investment corpus you will need to live through your retirement. So, calculate how much you will need in your retirement after factoring in inflation, medical needs, any future liabilities, your existing investments, and so on.

Accordingly, choose the right set of investment instruments, diversifying across asset classes for your needs – equity for the long term, debt for the short term, and so on.

Also note that the earlier you start investing, the more time your investment will get to grow and the bigger the corpus you will be able to accumulate due to the power of compounding. Also investing early in life will allow you to take more risks and invest in high-risk equity assets, such as stocks and equity mutual funds. While investing, do note that fund management expenses can turn out to be expensive over the long term. As such, choose low-cost investment options to minimize unnecessary expenses.

Don’t Ignore Inflation

Do not ignore the impact of inflation while estimating your retirement corpus. Calculate the inflation with regard to food prices and medical expenses to correctly estimate the pension amount you will require in your retirement every month.

Otherwise, you could end up underestimating the corpus you would need in your retirement years, and may have to liquidate your assets, such as your home, or other fixed deposits, or have to resort to loans (reverse mortgage of your home), or even borrowing from relatives or children to meet your living expenses.

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