Starting early is the key to retiring comfortably
This workforce needs to draw up the right financial strategy right from the beginning in order to make the best of their earnings while not compromising on the lifestyle that they desire and deserve.
Here is how a typical, 25-year-old, single male, earning about Rs 3 lakh a year should plan for a secure future. Let’s name him Rahul.
Early bird: With all the primary household expenses taken care by his parents, Rahul could easily save up to 25 per cent of his earnings right from the first month. This will enable him to tap the power of compounding with this savings in the long-term.
Long Term: He can choose debt investment instruments that offer tax rebate as part of a long term investment plan. He could also explore options like ELSS and also opt for SIP in order to even out market fluctuations in the long run. This works best for young professionals who do not have much financial commitments.
Health Insurance: Though youth is synonymous with health and fitness some ailments and conditions come unannounced for which Rahul will have to plan. Taking a health insurance cover of Rs 1,00,000 with a premium of Rs 10,000 annually will be adequate and also provide tax benefits under Section 80D.
Credit cards/ Debts: Rahul will need to use credit cards judiciously, make regular full payments to avoid high interest rates.
Emergency Funds: This is a must in case of sudden emergencies like a job loss, a family emergency or other critical situations.
Rahul is now 30, earning Rs 6 lakh a year. He is also married and his father has retired.
Marriage heralds the beginning of financial responsibility as one starts a family. Additionally, in the case of Rahul his father cannot support as he is living on his pension. He would now need to become more responsible and also be in a position to extend any financial support needed for his parents.
Life insurance: He will have to work out the exact amount of life cover that he needs and then take policies accordingly. Typically a cover of Rs 30 lakh, for a premium paying tenure of 20 years will have a monthly premium of Rs 11,000 is adequate in this circumstance.
Investment planning: This is the right time for Rahul to start investment planning by opting for any of the market options available after a thorough study and consultation with his professional financial advisor. Some of the common options available are shares, mutual funds, ULIPs and more secure instruments like fixed deposits in banks. However, since Rahul has age on his side he should opt for slightly aggressive products that could give him better returns.
Rahul, 35, is now a proud father of a 2-year-old daughter, earning an annual income of Rs 8 lakh. He has accumulated about Rs 7 lakh in savings and has Rs 2 lakh in his PF account.
Purchase of House: It is the time for him to start looking for a house.
Additionally, he must plan for his daughter’s future along with consolidating his retirement plans.
With an annual income of Rs 8 lakh he can easily get a home loan of Rs 35 lakh. However, Rahul should go for a house of about Rs 25 lakh for which his contribution will be about Rs 5 lakh as down payment.
By the age of 35, Rahul should have started dedicated investments to create a corpus required in later stages of life. He should expect returns at an average of at least 8-12 per cent on his investments.
The savings and other investments made by Rahul from the beginning will help him live a comfortable life in his own home after his retirement without having to depend on anyone else.
—Author is CEO, bankbazaar.com
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