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Financial Planning

Stage 3: Financial Freedom

This stage begins after you’ve settled in and started a family.


After your children begin their careers like you did, you will contemplate retirement as well, or you might have retired already, depending on your age and preferences.


The features of this stage include - 

  • The fall in the number of dependents as your children will become financially independent;
  • You will have more free time to spend with your family and on your hobbies;
  • If you retire, you will have no salary or business income. Your income will come by way of dividends and interest from your investments;
  • Inflation is a concern because it might reduce the money value of your assets; and
  • You might have to deal with health issues as your age increases.

The following points should be kept in mind while prepping for this stage -


I. Know Where You Stand Financially 

At this stage in your life, you would have retired from your job or from the business and it is expected that you would have built up a portfolio of investments that will tide you over your golden years. 

If this has not yet happened, the other option is to reduce your lifestyle expense to a level that is sustainable. 

If your lifestyle expenses are not within your means, you might find that you outlive your wealth, and that is not a situation you should be in. 

If you choose to get a financial planner, they can crunch the necessary numbers to see what level of expense is safely sustainable and can suggest various alternatives to live within your means if the level of wealth required is higher than the level of wealth available. 


II. A Contingency Fund

At this age, apart from the contingency fund you’ve been maintaining, you might want to have a separate contingency fund set aside for only health emergencies. 

This can be made to hold a few lakh rupees, since medical treatments can be expensive. 

This fund can also be used to supplement your health insurance in times of medical emergencies.

The medical contingency fund should cover and above your contingency fund for other emergencies.  


III. Asset Allocation

At this time, your invested assets should not be at any risk, so equity exposure should be kept to an absolute minimum, or preferably brought down to 0. 

This again depends on the level of wealth available. If you have built the required corpus, you need not take on any risk whatsoever. 

If not, and your expenses are already brought down to the basic requirements, you might need to consider opting for a reverse mortgage on your home, and/or taking on minimal equity exposure, such as by way of a Monthly Income Plan or a Balanced Fund. 


IV. Insurance

There are not many options for health insurance for senior citizens. Your best option is to continue with an existing health insurance policy, provided it is a useful one for you.

If the policy is not suitable to your specific health requirements, you can consider switching health insurance providers, but this can be an expensive proposition. 

Therefore, one should be careful while assessing the available policies carefully.

A mistake most people make is they don’t read the insurance policy document and rely on their agent to tell them anything relevant. Please refrain from doing this. 

It is your own responsibility to read the necessary documents and educate yourself on the investments or products you opt in to. 

If you feel confused, your financial planner can help you assess various policies and then suggest the best one for you. 


V. Making Tax Efficient Investments

The investments on which deductions are available are a great way to start building your wealth if you haven’t done so before reaching this stage.

If your income is above the tax free limit allowed to senior citizens (currently Rs. 3 lakhs per annum), the following options can be utilized:


  • PPF (Public Provident Fund)
    The interest rate on PPF for the quarter ending June 30, 2022 is 7.1 % per annum (compounded yearly).
    Keep in mind that there is a lock-in period after which you can withdraw within certain limits. This is suitable for your longer term investments.
  • Fixed Maturity Plans (FMP) 
    FMPs usually range for a duration of more than 3 years.
    The expected rates of return are reasonably high but they are riskier than bank fixed deposits.
    You can avail indexation benefits on these funds as well.
  • Senior Citizen Savings Scheme (SCSS) 
    This gets you a tax deduction on the invested amount, however interest earned (7.4% p.a., paid out quarterly) is completely taxable. This option is good for safe, guaranteed, regular income
  • Bank deposits
    A high yielding 5 year Bank Fixed Deposit will give you an additional 0.25% or 0.50% as a senior citizen, and the invested amount is tax deductible. 
    Here, the interest earned will be fully taxable in your hands.
    At the age of 60, achieving safe and regular income is a major goal. This can be done via the investments given above. 

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Units 18/35