If you are aiming for enjoying a luxurious, tension-free, financially independent life, you have to start right now and work on a smart financial planning for those post-retirement years. Here are some of the ways in which you can work on a smart retirement plan –
- Health insurance – During your retirement years, a lion’s share of expenses is drained in buying medicines and hospitalization. Ideally, you should buy health insurance by your late 30s because post 40s, the cost of insurance premium rises dramatically. If you develop a health condition in your 40s, the insurance company may even deny coverage or impose high costs. So, you should buy health insurance in your 30s or early 40s, when you are healthy, so that healthcare costs can be covered when you need it.
- Opt for EPF – The Employees Provident Fund (EPF) can be quite beneficial for someone who wants to accumulate a huge corpus during retirement. In EPF, 12 percent of the basic salary moves into the employee’s EPF every month with an equivalent contribution from the employer. Assuming, a person in his mid 20s starts working at a basic salary of Rs.25000 per month, he can amass Rs. 1.65 crore, when he turns 60, at the 8.5 percent interest rate, on EPF.
- ELSS (Equity linked saving schemes) – Tax saving mutual funds can not only help you earn a significant wealth on a long-term basis, you can also save money on taxes. While PPF and fixed deposits by the bank can give an 8 to 9 percent return on investment, equity linked saving schemes gives you significantly high returns than any other investment instrument under the purview of Section 80C of Income Tax Act. With an ELSS, you not only benefit from the shortest lock-in period (3 years) compared to other tax saving options, you also enjoy tax-free dividends and zero tax on capital gains in the long-term.
Additional tips for smart retirement planning
- Get a fair idea on how much wealth you’d like to accumulate on retirement, taking into consideration your financial goals, lifestyle that you are looking for, medical expenses and inflation. Accordingly, start an SIP in a well-chosen mutual fund tailored for retirement planning. Every month, a fixed sum of money that you choose would be auto-debited by your bank account, towards a mutual fund of your choice.
- The early you start saving and investing, the better you plan for your retirement. You should aim to save at least 20 percent of your income toward retirement. As your income increases, you should start contributing more towards your retirement fund.
- Though your mutual funds can be tied to specific goals like buying a house, planning for children’s education, etc; you should resist the temptation for premature withdrawal. If you withdraw the money before your retirement, it can interfere with the power of compounding and affect the corpus that you can stand to amass on your retirement.