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Retirement Financial Plan for the Self Employed
June 13 , 2013

In companies retirement savings is made easy, with automatic contributions from paychecks into PF account. On your own, retirement savings are up to you and you can make smarter choices of investment for your retirement portfolio.

To decide how much to contribute each month you need to know much amount of money you will annually require in order to continue in your current lifestyle after you retire. Don't forget to factor in inflation in your calculation.

Say your current annual expenses are Rs 4, 20,000 and you expect to retire in 25 years. If you expect to sustain yourself for 20 more years with your retirement fund, your retirement fund investment to yield 10% and the inflation to be around 8% you need approximately Rs 4, 55,00,000  when you retire!

When you consider investment options for retirement they must be tax efficient and give a yield that ideally beats inflation. Various retirement investment options are discussed below:

1. PPF

Public Provident Fund (PPF) is a scheme of the Government of India with a maturity of 15 years offering an interest rate of 8% compounded annually. This scheme is open for both salaried and non-salaried individuals. The minimum deposit amount is Rs 500 and maximum amount is Rs 70, 000 in a financial year. Deposits of PPF are invested in bonds and government securities.

Maximum number of investments is 12 in a year and 2 in a month subject to the limit of Rs 70, 000. Deposits and interest received on deposits are tax free. There is no limiting age for purchase of the scheme. An account holder can choose to continue his account for any period after 15 years without making deposits in which case the deposits will continue to earn interest. To make additional deposits after maturity the account holder can extend his account for any period by 5 years at a time. The scheme can be purchased from any Post Office or a nationalized bank.

2. Pension plans

This is the name given to retirement plans offered by insurance companies. As with other insurance plans premiums can be paid monthly or annually. The entry age is between 18 years and 65 years for most providers. The upper age may be relaxed by some pension plan providers.

Premiums are tax-free up to Rs 1, 00,000 under section 80ccc (subject to maximum amount of Rs 1, 00,000 claimed under sections 80c, 80ccc, 80ccd). 1/3 rd of maturity payout is tax free while the remaining 2/3rd
 amount is taxable according to applicable tax slab.Maximum of 1/3 rd of the maturity payout can be withdrawn at the time of maturity. Annuity worth at least 2/3 rd amount must be bought from any insurance provider. From the time of maturity annuities are paid out to the annuitant for life.

The drawback of pension plans of insurance companies is that interest rate offered is as low as 4% to 6% which does not make it a smart investment option. The opportunity cost involved is higher rate of interest available on alternative investment options that also provide tax benefits.

3.  Mutual fund

Mutual funds are excellent options for retirement investment. An equity based fund will beat inflation and give better returns than debt funds. Investing in mutual funds through regular SIPs will give you the benefit of cost-averaging. One can also invest in ELSS (equity linked saving scheme) which offers returns more than debt funds and investment up to Rs 1, 00,000 is tax free under section 80c. There is a lock-in period of 3 years. Long term capital gains and dividends are tax free under the current tax structure. Investments have no maturity period and there is no upper cap on entry age.

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