The high decibel advertising by the Life Insurance companies have already created a market of fairly conscious individuals who start planning for their retirement even when they are in the middle of their working lives. Also, the newly set up Pension Fund Regulatory Authority of India (PFRDA – which hopefully will soon become a statutory body) has done lot of work towards designing an excellent pension product, which is already being used by the Government and select PSU employees.

However, even among all this newly found (and welcome) consciousness on planning for retirement, we normally miss out on planning for medical expenses after retirement. I am sure each one of us will know somebody whose parent was hospitalized and was put on life support system for days together. Apart from the emotional stress caused by the hospitalization of a loved parent the overwhelming financial burden of such an illness (bills of Rs. 15 lacs to Rs. 20 lacs are not unheard of) has put several middle class families financial stressed for at least a decade or so.

All of us know that as we age, the need for medical attention and hospitalization increases. Advancement of medical technology has also ensured that we will live longer than our forefathers. But unfortunately it comes at a very high cost. Medical expenditure has been galloping at a rate much higher than the average inflation rate due to shortage of quality hospitalization infrastructure and use of sophisticated technology. Therefore planning for medical expenses after retirement is vital as it will be impossible (or too expensive) to get a policy after you retire.

So don’t try to dig a well only when you get thirsty. Individuals in their 30s or 40s today need to plan now for the medical expenditure after they retire. In fact the best planning can be done by individuals who are still healthy and without any pre-existing diseases.

So before setting out to plan your post retirement medical expenses, you should know the three kinds of risks that you need to cover:

1. Your regular Mediclaim policy must not abandon you just when you need it the most.  So look at the maximum age up to which your current Mediclaim policy is renewable. As per the data available from the Apnapaisa Research Bureau only three companies offer policies that are renewable up to the lifetime - Apollo Munich Easy Health policies, United India Insurance - Mediclaim Policy Platinum and Oriental Insurance - Health Insurance. Additionally the following plans will renew the policy till 80 years of age.

1. As inflation rises your existing Mediclaim policies will become inadequate to handle the medical expenditure that arises after retirement. A mediclaim plan currently for Rs. 5 lacs may look adequate but this will become grossly inadequate after 15-20 years due to sheer rise in inflation and medical costs that have historically outstripped inflation by several multiples.

To cover for this risk you should go in for high deductible medical expenses reimbursement expenditure policies such as United India Insurance Super Top up policies. (See my write up in DNA of April 18, 2009). These will offer fairly high coverage of up to Rs. 15 lacs after deducting the first Rs. 3 - 5 lacs of hospitalization expenditure (which will get covered by your regular mediclaim policies). These plans are relatively cheap because of the high upfront deductible. In the current years these will help you cover against catastrophic medical expenses but as the years go by this policy (in combination with your regular mediclaim policy) will be just enough to cover your regular hospitalization expenses. Even here you must take polices that cover you when you need them the most – that is the age upto which the policy is renewable needs to be the highest. (Refer table below for details)

For both 1 and 2 above it is better to pay a slightly higher annual premium today to get renewability till a higher age (as per IRDA guidelines insurance companies cannot deny renewal unless it is on the grounds of fraud, misrepresentation or moral hazard).

1. You also need a cover for medical expenses that are not covered by either of these policies. Say for example, the amounts incurred for :

   1. Diagnostic tests (which regular policies normally cover only if they lead to hospitalization in 30 days) which are increasingly becoming very expensive,

   2. Treatment of chronic diseases such as lifelong medicines for organ transplants (not covered beyond 60-90 days after hospitalization) or

   3. Expensive implements (e.g. CPAP machines for obstructive sleep apnea)

It may be alright to leave these uncovered currently when you are still earning but after retirement it will become a big burden. A good way to plan for these expenses is through a separate nest egg for medical expenditure for yourself and spouse (your children should be planning this for themselves) through the regular route like diversified equity fund or an index fund. The target amount for this can be based on your current medical cover adjusted for inflation.

Some experts suggest using the Unit Linked Health Insurance Plans offered by Life Insurance companies for this purpose of creating a nest egg for such expenses, as you can utilize any left over tax deductions under section 80D (for payments made on Health Insurance covers) that may otherwise lapse. I, personally, do not recommend them due to the high costs associated with these plans including the high insurance costs that are deducted from the fund value which more than negate any tax advantage that contribution to these schemes may bring.

To summarize, plan now for your medical expenses in the old age and don’t let your retirement plan go awry.

Pointers:

• Medical expenses after retirement can derail your retirement planning

• Go for high deductible (top up and super top up) policies cover that will provide cover for catastrophic medical expenditure in current years and still is enough to cover regular hospitalization expenditure after retirement.

• Use the regular method of SIP in a diversified equity fund or index fund to create a nest egg for your non-covered medical expenses.

The story is about a Public Sector Undertaking (PSU) which came up with an ultimate refrigerator. With its lowest market price, standard features and much lower power consumption, it was quite a buy. The Company appointed a dealer network which was experienced in selling consumer durables of other manufacturers. Now that Company was confident of its superior product backed by good dealer network, it did not feel the need for any advertising budget and paid peanuts as compensation to its dealers. But there was no manufacturer ‘warranty’ on the refrigerator.

The refrigerator was launched and now the time had come for the Company to take stock of sales after six months. The verdict was clear. Inspite of being a superior product, it was just not taking off. The customers were not even aware of the product. The dealers also made no attempt to sell the product to the customers who walked into their showrooms as they were not making any money. In fact, few customers who had read about the product in the newspapers, came asking for it were skilfully diverted to other competing products. Reason being - the dealers made more money on such competing products even though they were not as good.

Clearly the manufacturers dogma that if you make a good product consumers will come and get it had taken a beating here.

If we substitute this analogy with the Pension Fund Regulatory and Development Authority (PFRDA) for the – the PSU refrigerator manufacturer, Banks (Point of Purchase) for the dealers, the New Pension Scheme (NPS) for the new refrigerator and lack of guaranteed returns for the absence of warranty, you have the similar result.

Let’s analyse the scenario here in detail:

The high household savings rate in India has been much touted. Perhaps this drives the thought that the savers/investors have no choice but to channel a part of their savings in this otherwise excellent long term savings scheme – the National Pension Scheme. However, most Individual savers in India prefer traditional savings instruments such as land, gold and bank fixed deposits. One thing common among these instruments is that it requires one time investment with no obligations on making a regular contribution over time. In fact even here the relatively newer products such as PPF, NSC etc. which are safe and provide good returns also needed support from individual sales agents to make sure that the operational difficulties in investing in these products is taken care of.

This kind of investments naturally favours the relatively better off people since they would have the lump-sum available to invest. The whole concept of systematically saving and investing something over time to fulfil a financial goal requires discipline and commitment.

Considering this NPS is a good scheme and no doubt gives excellent results but it still is a tough sell especially if the return is not guaranteed. As a result such products need both – wide publicity as well as reasonable incentives for the selling. Unfortunately both are lacking in the otherwise excellent pension scheme. Thus perhaps leading to an excellent product, not ready to take off. (It is not just the current tax disadvantage that this product suffers vis-à-vis other savings products that is causing such low off take). Moreover the general awareness of the product itself is quite low.

Another potential future issue is the extremely low fund management charges paid to the fund managers. To give you an idea - if the fund house is managing Rs.10,000 Crores of funds, the total payout will be Rs. 9 lacs only which is not even enough to cover the salary cost of a single executive. Obviously either the managers hope to make some money in some other manner (brokerage etc. for their sister companies perhaps) or will perhaps loose interest in the business over time. Anyway this will become a problem only at a future date when the scheme becomes popular.

We hope that after the proposed tax changes take effect in 2011, we will also see changes in the selling structures and incentives for all the stakeholders in the NPS.

We wish that this unique scheme which can be a boon for Indian investors looking for long-term disciplined savings does not meet the same fate as that of mythical PSU Refrigerator manufacturer mentioned above.

Planning to get retired after getting rich is a dream of every person today engaged in earning a livelihood for achieving a sound financial and monetary base. Get rich retirement solutions have also gained prominence due to the fact that present day life is full of uncertainties like serious health disorders, unexpected accidents, even death that may leave family members of deceased retired person into financial crisis if he doesn’t create strong money and finance provisions for providing a happy and secure life to his family. Recently with development of Indian economy due to increase of foreign investments in Indian government as well as private sector youthful job professionals of India have seen salary increments and hikes. Along with meeting important requirements of life including basic necessities like housing, food and clothing today every youth is looking forward into the future for achieving maximum money savings and a secure financially rich retirement from his job at a very early phase. Tips given below may guide you select the best financial savings and investment plan:

• Gain control on your financial expenses:

A simple life style enhances more money savings and enables you to invest your hard saved money into a high monetary return and long term retirement investment plan. Just take control on your hi-tech cash payment transactions. Devote your attention in simple yet easy daily routine pursuits like spending with your family and friends, simple hobbies like reading, writing, walking and traveling along outskirts of your city on a small picnic this won’t cost you too much.

• Keeping your financial and retirement goals together:

Easy, early and rich retirement solutions require keeping your financial and retirement goals together. In the early years of your job you should plan your financial goals and devise ways to achieve it. Chalk out your individual as well as family expenses if your spouse is earning then you could frame a monthly family budget with combined income of yourself and your life partner. Then you should select a reliable income generating retirement plan after keeping current age human life expectancy as well as current inflation hikes.

• Make your self inclined towards more money savings:

For selecting the best, reliable and get rich retirement plan you should avoid increasing your lifestyle expenses no matter your salary is increasing constantly. Each fraction of money saved is money gained. Financial experts dealing with life insurance, mutual funds, shares & equity including income generating retirement solutions suggest to devote 25% of monthly income in savings.

• Start investing money early to double your money:

By investing money early you can double your money as after every 5-6 years rate of money returns on financial return also double. Whereas in loan plans and mortgage interest rates on money recovery increases.

• Choose a long period retirement plan:

Choose a long period retirement plan or finance investment solution prepared with correct monetary logistics. For this purpose you could consult an experienced financial consultant at periodic intervals.

• Try to create additional sources of income:

By creating additional sources of income you make your life easier from monetary point of view as it helps you to pay high amount monthly, half yearly or annual investment premiums on rich making retirement plans. For this purpose you should review your talents and explore part time job solutions that demand less investment of time daily. By following these simple tips you could enhance chances of get rich along with a secure retirement.

I was pleasantly surprised to receive a call from Raj Gupta, who has been a close friend since my CA days. But bigger surprise unfolded when he told me that he had won an argument with his wife for the first time in life,  all because of me!

He was very excited, thanked me profusely for my article in DNA. ( Refer my article on October 3 – Buy another home…)  I was even more surprised to note that my advice can make people win an argument with their wives. ( A thing that I have personally never been successful at).

Naturally my interest level in the conversation rose. I was keen to know the details. He explained that for last few months he has been arguing with his wife over buying ready made farm house-cum-plot near Karjat, approx. 100 Kms from Mumbai. His  wife has been opposing the plan, closing that it was a luxury that they could ill afford at this point of time.

And my above article extolling the virtues of buying a second home helped him in convincing his wife that it was not a luxury purchase but an investment he was making for their retirement.  Raj said, “See, even Harsh supports my view”.  Hence Raj was extremely happy with the article. 

Paradoxically I need to clear this illusion not only for Raj but for all of you who have stretched my advice a bit too far. What my article really suggests is that buying another house which is capable of being rented out.  It can be a good retirement planning tool. Moreover it should not be important that whether you would have yourself liked to stay in that house or treat it as weekend gateway. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

But what Raj  was proposing is not in consonance with my suggestion, as a leisure property  could hardly be rented out on a continuous basis. Besides it is difficult to liquidate a leisure property as it cannot be sold easily thus becomes difficult to realize the value of such properties in India. Despite growing economy, FDI influx, rising urban incomes, reach of internet and many such factors, leisure property market is not very well developed in India. Moreover, there is lack of transparency at the operational level and so is the depth in such markets. Hence, getting resale value of a leisure property is very difficult, getting rental for the leisure property is even more difficult.

Let me add here that even the builders of such leisure properties have to rely on large marketing organization and marketing campaign to sell them and it is quite time and effort consuming process. This is not practical for an individual looking to sell his leisure property.

So should you never buy a leisure property? No, I am clearly not saying that, But it should not be bought, thinking it is a good investment. It should be bought from that part of your assets that are allocated to pay for luxury that most people are entitled to after achieving a certain earnings and savings status. Buying it under the mistaken notion that it is a great investment, could perhaps be a big financial mistake. In the event of any stress in your financial life, your ability to liquidate that leisure property quickly might be very difficult. But clearly all those of you who want to get away from all the distress around and connect with your families over the weekend, in a self-owned weekend gateways can positively impact your overall lifestyle and improve your earning potential. To that extent it can be considered to be well spent.

So I am not surprised that once again another wife has won the argument.

Alas! my friend Raj’s happiness was short lived. But then he, like most of us, is a good loser and gives in with grace when he knows he cannot win the argument.

Most people build a nest egg for their retirement by investing a regular sum of money into a Systematic Investment Plan (SIP) of a mutual fund or buy a pension plan from an insurance company or regularly invest in a bank recurring deposit or government backed instruments such as PPF and NSC, etc. A very few well-informed consumers are also opting for the newly launched New Pension Scheme.

But there is another very effective means to build a sizeable pension corpus - Buying another residential house for the purpose of deriving rental income as well as long-term capital appreciation.

I will illustrate this with an example.

Mr. Prabhat Varma has ability to pay a down payment of Rs. 2 lacs and can service an EMI of Rs. 6,000 every month (in other words he is able to save Rs. 6,000 per month).

This means that he can invest in a house worth Rs. 11 lacs for which he will be able to get a loan of around Rs. 9 lacs. The EMI for this 20-year loan at 9% is around Rs. 8,100 per month, which Mr. Varma will easily be able to pay from the rental income (estimated at around Rs. 3,000 per month), clubbed  with the existing savings of Rs. 6,000 per month. The tax deduction on the home loan (for rental properties the tax deduction will continue even under the new Direct Tax code) and any potential increase in rent in later years is just an icing on the cake.

Even if we assume a rather conservative 10% p.a. capital appreciation the property will be worth Rs. 74 lacs at the end of 20 years. Thus the easy availability of home loans even for residential property bought for the express purpose of renting it out effectively turns this investment into a SIP into real estate. 

While Mr. Varma crystallises his plan for another house purchase, he should keep few of these things in mind:  

1)      This is not about the house that you are staying in, the house in question here is  purely for investment purpose. 

2)      An investment horizon of at least 10 years is needed for this to be effective,  so if you are planning to retire by 60, and then this is not for you if you are already above 50 years of age.

3)      This is much riskier than a bank fixed deposit (the expected returns obviously are higher to compensate for the higher risks) and so if your risk appetite is low then this investment is not for you

4)      A meaningful Real estate investment will require much larger initial investments as also much larger continuing investments. Also the flexibility to miss an regular investment instalment is not available since the continuing investment is by way of loan repayment.

5)      It is not important that whether you would have yourself liked to stay in that house or not. You should buy from a rental perspective. In fact buying a house in smaller towns that you have some knowledge and connection with, might be a great decision given the fast pace of growth that is likely to be experienced by smaller towns and might give good returns over a long period of 20 years.

6)      Investment in real estate is a relatively high maintenance investment in terms of dealing with societies, finding and dealing with tenants, etc.

7)      Though state and local laws are fast changing tenancy laws in some states and property taxes in some cities make renting out a property a non-viable option. So avoid investment in such areas.

So this investment proposition is ideal for the likes of Mr. Varma who like saving regularly in traditional assets such as real estate.

How about you? Are you like Mr. Varma?

The new pension scheme has some innovative features. It is a long- term investment vehicle that will deepen our capital markets and make a much needed provision for self-funded old age social security net. But it also has several shortcomings that need to be overcome before it re-shapes India

 http://www.apnainsurance.com/pension-plans-india/New-Pension-Scheme.html