Retirement planning for self-employed persons in India is an important but sometimes disregarded part of financial management. A recent poll found that 67% of Indians have a retirement strategy in place, up from 49% in 2020. It demonstrates how the Covid-19 outbreak has made individuals more conscious of the importance of saving actively for retirement.
Self-employed people, on the other hand, were found to be falling behind in terms of retirement planning and preparation. Of the 33% of those surveyed who said they don’t need a retirement plan, the majority live in Tier-I cities, earn between Rs. 50,000 and Rs. 75,000 per month, are between the ages of 51 and 60, and are primarily self-employed.
Mind-set is different:
There is clear attraction to being your own boss, but anybody considering entrepreneurship or self-employment should be aware that it also entails finding out how to save for retirement on their own. The self-employed have a different mind-set toward retirement preparation than salaried persons. Salaried people are more concerned with external factors such as economic downturn, inflation, job and income stability, and so on. The self-employed are less concerned about these issues. According to the survey, self-employed people are more likely to spend impulsively. These traits influence their retirement preparation.
Requirements are different:
Being self-employed provides some independence, but it is not a reason to avoid preparing for retirement. Indeed, it emphasizes the need of saving money. Even if you believe you will eventually sell your business and utilize the proceeds to support retirement, there may be many uncertainties coming your way in the future that you may not be aware right now. A retirement plan may serve as both a buffer and a tax-efficient tool during your peak earning years.
One of the most important considerations is that self-employment generates unpredictable revenue. Their cash flows vary. This has a major influence on their capacity to save. An individual with a salary has greater control over his cash flows than a self-employed.
There are no employer-sponsored retirement plans available to self-employed. They do not have access to the essential Employees Provident Fund (EPF) and hence must save for retirement on their own.
Inadequate Planning:
Many self-employed people embark on a do-it-yourself (DIY) endeavour when it comes to retirement, only to fail miserably. They would be better off talking to a financial advisor. Some people misjudge their life expectancy and the funds necessary for retirement. Many people outlive their retirement funds because they underestimate the length of time they need the corpus to last. Another error many make is failing to diversify their retirement investments. You shouldn’t put all your eggs in one basket.
Many people start saving for retirement much later. Many self-employed people do not have a set retirement age in mind, and hence do not have a coordinated financial strategy for retirement and inheritance transfer. Some do not set up an emergency fund. When a financial crisis comes, they deplete their retirement savings, and as a result, the self-employed are more likely to take out loans and retire in debt. They then use their savings to pay back their debts.
So, what should be your plan?
Start early so that your savings can multiply. Have a Chinese wall separating company and personal money. That is, keep business and personal money distinct and avoid combining them at all costs. That is, get a set salary from the company and invest a portion of it in a retirement fund. When faced with brighter possibilities, self-employed professionals may be motivated to reinvest the majority of their savings back in their business. They should diversify beyond their company by investing in liquid assets such as mutual funds.
Though self-employed people are not eligible for employer-sponsored retirement plans, they can still take advantage of government programs such as NPS, PPF, Atal Pension Yojana, and so on.
They can invest in the National Pension System (NPS), a government-run, low-cost retirement plan that allows people to select a suitable mix of debt and equity exposure. At maturity, a portion of the accumulated funds must be put in annuities so that they can earn a lifetime pension. Contributions to NPS are tax deductible under Sections 80C and 80CCD(1B) of the Income Tax Act. NPS withdrawals are partially taxed.
The Public Provident Fund (PPF) should also be looked at because it is supported by the government of India. It provides a competitive interest rate (currently 7.1%) and the safety of invested amount. The interest and returns are not taxed, making this a tax-efficient investment.
In addition to the government initiatives described above, self-employed people can look into other investing opportunities. Systematic investment plans (SIPs) for mutual funds can be used during the building up of wealth. Mutual funds have the potential for better returns than typical fixed-income investing. In the withdrawal phase, a Systematic Withdrawal Plan (SWP) outperforms in terms of tax effectiveness and flexibility.
Fixed deposits (FDs) and bonds are popular among cautious investors since they are low risk and offer returns that are guaranteed. While FDs have set interest rates, bonds might offer somewhat greater yields based on the issuer’s credit rating. Both alternatives are appropriate for people who value preserving their capital.
Purchase keyman insurance to ensure that the business is not harmed by an unexpected incident. An insurance policy that shields companies against financial loss brought on by the passing away, terminal sickness, or serious illness of a key employee is called keyman insurance, often referred to as key person insurance. If the self-employed person, who is a crucial part of the firm, is unable to work, the insurance reimbursement can be used to offset the expenses of finding a substitute or to recover the company’s lost earnings.
Business owners might also consider purchasing life insurance via the ‘Married Women Protection (MWP) Act’ to shield their family from creditors. The MWP Act ensures that insurance policy payouts are kept for the wife and their children, regardless of any outstanding obligations owing by the husband. The idea underlying this rule is that a life insurance policy’s proceeds belong to the policyholder’s family and cannot be transferred to anyone else.
Conclusion:
Many self-employed persons are concerned about their financial future. Retirement planning allows you to ensure a regular income stream during your retired years. It allows you to keep your preferred lifestyle while meeting financial commitments. Self-employed people may not have the security of a continuous salary while working, therefore saving for retirement is much more important. As an independent professional, you must take control of your finances and begin planning for the future immediately. Make sure you conduct comprehensive market study to choose the best retirement solution for your financial circumstances.
