- Date : 09/09/2019
- Read: 5 mins
With more and more enterprises being started by women, they must also be well versed with preparing financially for retirement.
As per the Sixth Economic Census, which was released by the Ministry of Statistics and Programme Implementation in July 2014, 14% of total business in India are run by women. Out of 58.5 million entrepreneurs, 8.05 million are women. These are business enterprises which range from a shop in the corner to venture capital-backed startups. The number of people employed in women-led enterprises is close to 13.5 million.
Almost 80% of these businesses are self-funded, which means that a large proportion of female business owners are completely dependent on their business for paying staff salaries, handling operational expenses as well as paying themselves a regular income.
Hence, it is imperative for female business owners to plan systematically for their retirement. Here are seven ways in which they can save up for retirement.
1. Forecast the cost of your retirement
While working towards creating a retirement corpus, we often underestimate the impact of inflation. For example: If we feel that Rs 3 crore might be a substantial retirement corpus to have as of today, it may not be enough after 30 years. Therefore, those who are working towards creating a retirement corpus of Rs 3 crore after 30 years might find this amount woefully inadequate when retirement approaches.
From 2009 onwards, the average rate of inflation has been 7.6%. Assuming that inflation rate is considered as 7% over the next thirty years, the value of Rs 3 crore after 30 years would be equivalent to Rs 22.83 crore. This means one has to work towards creating a corpus of Rs 22.83 crore in 30 years.
Similarly, your expenses after 30 years might be a little more than seven times as of today. So, if your monthly expenses are close to Rs 50,000 as of today, they might be around Rs 3.6 lakh after 30 years.
2. Set your milestones and plan towards achieving them
Retirement can be enjoyed to the fullest if all other milestones for which financial assistance is needed are surpassed comfortably. These milestones may include short-term goals such as purchasing a car or long-term goals such as buying a house or arranging funds for children’s higher education. One could start investing in equities through mutual funds to achieve these goals. Suitable funds could be selected based on the type of goal – short term or long term.
If one is averse towards investing in market instruments, traditional instruments such as public provident funds or even the National Pension Scheme could be explored.
3. Pay yourself a salary
It is important for an entrepreneur to fix a salary. This will enable the entrepreneur to use her income judiciously. This is a critical decision to take because when business is good, one might be tempted to fritter away the extra income that one’s business has earned on personal purchases. Of course, investors or board members in a structured entity such as a private limited company or a listed firm might not allow an entrepreneur to do this, but as mentioned earlier most businesses owned by women are smaller setups where the business owner has substantial control over her business.
4. No investment is small
According to AMFI, the average SIP size in FY 2018-19 was Rs 3,070 per SIP account. Most individuals feel that it would be appropriate to start a SIP only if they can invest a few thousand rupees every month. However, most SIPs can be started by investing just Rs 500 per month. If this amount is invested over the long term, it can transform into a significant amount. For instance, investing Rs 500 per month over 30 years at a CAGR of 15% would offer a corpus of about Rs 35 lakh. Bear in mind that most mutual funds have offered a CAGR of more than 15% over the last 20 years.
5. Create an emergency corpus
Every business has its share of ups and downs. If one’s business income falls, then one may end up redeeming one’s investments before they can offer healthy returns. This results in substantial opportunity loss for the entrepreneur. Therefore, it is advisable to create an emergency corpus which can sustain one’s outflow for at least six months. If a business owner also has a family, she must consider creating an emergency fund which can sustain expenses for at least a year.
6. Keep stepping up your SIPs
Stepping up one’s SIPs significantly increases one’s retirement corpus. Investing Rs 10,000 per month for 30 years would offer a healthy corpus of Rs 7 crore at a CAGR of 15%. However, by stepping up one’s SIP by a marginal value of 8% every year can pump up the corpus into Rs 11 crore.
Unlike a salaried individual, an entrepreneur might find it difficult to predict whether her income can rise at a fixed rate every year. Therefore, an entrepreneur can step up her SIPs by smaller values year on year.
7. Purchase health insurance
In the absence of health insurance, if a medical emergency occurs, a business owner may be forced to rely on her investments and savings. This could end up negatively impacting her retirement plans. Purchasing health insurance will ensure that the business owner doesn’t need to worry about breaking her retirement-related investments.
By preparing in advance for retirement, a female business owner can ensure that she doesn’t need to deal with the fear of the unknown and this focus completely on getting the best out of her professional and personal lives. Have a look at these 5 Challenges faced by women entrepreneurs.
As per the Sixth Economic Census, which was released by the Ministry of Statistics and Programme Implementation in July 2014, 14% of total business in India are run by women. Out of 58.5 million entrepreneurs, 8.05 million are women. These are business enterprises which range from a shop in the corner to venture capital-backed startups. The number of people employed in women-led enterprises is close to 13.5 million.
Almost 80% of these businesses are self-funded, which means that a large proportion of female business owners are completely dependent on their business for paying staff salaries, handling operational expenses as well as paying themselves a regular income.
Hence, it is imperative for female business owners to plan systematically for their retirement. Here are seven ways in which they can save up for retirement.
1. Forecast the cost of your retirement
While working towards creating a retirement corpus, we often underestimate the impact of inflation. For example: If we feel that Rs 3 crore might be a substantial retirement corpus to have as of today, it may not be enough after 30 years. Therefore, those who are working towards creating a retirement corpus of Rs 3 crore after 30 years might find this amount woefully inadequate when retirement approaches.
From 2009 onwards, the average rate of inflation has been 7.6%. Assuming that inflation rate is considered as 7% over the next thirty years, the value of Rs 3 crore after 30 years would be equivalent to Rs 22.83 crore. This means one has to work towards creating a corpus of Rs 22.83 crore in 30 years.
Similarly, your expenses after 30 years might be a little more than seven times as of today. So, if your monthly expenses are close to Rs 50,000 as of today, they might be around Rs 3.6 lakh after 30 years.
2. Set your milestones and plan towards achieving them
Retirement can be enjoyed to the fullest if all other milestones for which financial assistance is needed are surpassed comfortably. These milestones may include short-term goals such as purchasing a car or long-term goals such as buying a house or arranging funds for children’s higher education. One could start investing in equities through mutual funds to achieve these goals. Suitable funds could be selected based on the type of goal – short term or long term.
If one is averse towards investing in market instruments, traditional instruments such as public provident funds or even the National Pension Scheme could be explored.
3. Pay yourself a salary
It is important for an entrepreneur to fix a salary. This will enable the entrepreneur to use her income judiciously. This is a critical decision to take because when business is good, one might be tempted to fritter away the extra income that one’s business has earned on personal purchases. Of course, investors or board members in a structured entity such as a private limited company or a listed firm might not allow an entrepreneur to do this, but as mentioned earlier most businesses owned by women are smaller setups where the business owner has substantial control over her business.
4. No investment is small
According to AMFI, the average SIP size in FY 2018-19 was Rs 3,070 per SIP account. Most individuals feel that it would be appropriate to start a SIP only if they can invest a few thousand rupees every month. However, most SIPs can be started by investing just Rs 500 per month. If this amount is invested over the long term, it can transform into a significant amount. For instance, investing Rs 500 per month over 30 years at a CAGR of 15% would offer a corpus of about Rs 35 lakh. Bear in mind that most mutual funds have offered a CAGR of more than 15% over the last 20 years.
5. Create an emergency corpus
Every business has its share of ups and downs. If one’s business income falls, then one may end up redeeming one’s investments before they can offer healthy returns. This results in substantial opportunity loss for the entrepreneur. Therefore, it is advisable to create an emergency corpus which can sustain one’s outflow for at least six months. If a business owner also has a family, she must consider creating an emergency fund which can sustain expenses for at least a year.
6. Keep stepping up your SIPs
Stepping up one’s SIPs significantly increases one’s retirement corpus. Investing Rs 10,000 per month for 30 years would offer a healthy corpus of Rs 7 crore at a CAGR of 15%. However, by stepping up one’s SIP by a marginal value of 8% every year can pump up the corpus into Rs 11 crore.
Unlike a salaried individual, an entrepreneur might find it difficult to predict whether her income can rise at a fixed rate every year. Therefore, an entrepreneur can step up her SIPs by smaller values year on year.
7. Purchase health insurance
In the absence of health insurance, if a medical emergency occurs, a business owner may be forced to rely on her investments and savings. This could end up negatively impacting her retirement plans. Purchasing health insurance will ensure that the business owner doesn’t need to worry about breaking her retirement-related investments.
By preparing in advance for retirement, a female business owner can ensure that she doesn’t need to deal with the fear of the unknown and this focus completely on getting the best out of her professional and personal lives. Have a look at these 5 Challenges faced by women entrepreneurs.
