Q1. My spouse and I are 58 and 55 years old respectively. We are planning to retire when we both reach 60. We have a well-diversified portfolio, and we have made investments across real estate, gold, equities, FDs, etc. We do not have any liabilities and our children are well-settled. How do we plan our retirement?
It is wonderful to know that while managing your work, you were also managing your finances well and have built up a well-diversified portfolio. Retirement is a major transition that is around the corner for both of you. A well-structured plan can help you lead your post-retirement life without any financial stress for years to come.
Your expenses and requirements don’t retire when you do. Your income will now have to come from your investments. To maintain a good lifestyle, you will need to generate sufficient income, while avoiding unnecessary risks. It would be a good idea to review your portfolio and decrease exposure to risk. You should look at building a portfolio with a mix of fixed-income and market-linked products.
Asset allocation: When you are close to retirement you do not have to limit your investments to debt or fixed-income instruments only. You have about 30 years at the least in the post retirement period to plan for. Equities can generate higher returns and help beat inflation during these 30 years also. A prudent combination of debt and equity can help you generate good returns, meet regular expenses, and achieve your goals.
Move to debt instruments: Equity investments are volatile in nature. Once you are closer to your goal, it is important to gradually move from equity to debt. However, instead of exiting the markets abruptly, consider using the systematic transfer plan (STP) route.
Plan legacy: Though your children are well-settled, you may want to pass on a legacy to them. If you are planning to create a trust or give the inheritance as a gift, examine all legal, compliance and taxation angles.
Keep emotions at bay: Retirement can get overwhelming at times. Avoid making any financial decision based on your emotions. Discuss with your financial advisor to get an objective point of view and decide accordingly. In case you need help managing not just the technical side of money, but also the personal side of money then you could reach out to a CeFT (Certified Financial Transitionists) they are experts in helping you through life transitions.
Q2. I am 28 years old and single. I work with an MNC as a consultant. Recently, our financial advisor suggested that given the medical history of the family, we should opt for a critical illness policy. Is it necessary?
Any critical illnesses can create a big dent in the family’s financial reserves. It can hamper income flow and deplete savings and investments. A critical illness policy acts as an income replacement policy.
While most health insurance policies cover only hospitalisation expenses, a critical illness policy provides a lump sum amount as compensation. This amount can be used for treatment or any other expense.
Standby income: When you buy a critical insurance policy, you ensure that a sudden illness will not hamper your financial planning and disrupt your savings and investments. Some critical illnesses may affect one’s working ability, leading to a loss in income. Apart from helping with the treatment, compensation from a critical illness policy can also serve as income to meet your regular household expenditure.
Ready funds at critical time: Cost of medical treatment has been rising steadily, especially in the case of critical illnesses. A critical cover saves the family the hassle of arranging funds at a crucial time.
Higher coverage, lower cost: The premium payable for a critical illness policy is less compared to a normal health insurance cover. The reason is that a general health insurance policy covers multiple ailments, whereas a critical health insurance policy covers only some specific ailments at a perilous stage, as mentioned in the policy document.
Larger sum, longer term: Sum insured under a critical illness policy is generally larger and for a longer period. Some companies offer lifetime critical cover.
No hospitalisation proof needed: In regular health insurance policies, one needs to submit documents (including bills) to prove hospitalisation and to claim compensation. However, in a critical illness policy, one can get the claim processed based on the diagnosis alone.
Tax benefits: A critical care policy is exempted under the provisions of Section 80D, subject to prescribed limits.
As our lifestyles become more and more sedentary, there has also been an increase in life-threatening diseases like cancer. It is prudent to have a critical illness policy, either as a separate plan or as a comprehensive rider. It will ensure that you receive the best medical treatment without exhausting your savings.
Q3. I am a 45-year-old IT professional. My wife works as a teacher. I have life insurance and health insurance provided by my company. I also have a decent portfolio. My advisor is suggesting that I should opt for additional personal insurance. Do I need it?
We often tend to ignore the importance of insurance as a critical financial instrument to secure the future of our loved ones.
First, let us talk about health insurance provided by employers or group health insurance. For most of us, health insurance is the least of our worries. Why bother when there is no history of illness, and we are sure we are fit? If the employer is already providing health cover, why spend on more? Right? Think again!
Drawbacks of group insurance
- Valid only till the time you remain an employee of the organisation. If you are unemployed or taking a sabbatical, you lose the cover.
- Mainly covers occupational hazards and the most common general ailments. Often do not cover serious illnesses and related medical procedures, including surgeries.
- Does not cover all hospitalisation expenses, unlike most new-age policies that provide comprehensive support.
- Does not provide for general consultation or diagnostics.
- Coverage can vary depending on seniority and pay scale.
- Coverage may cease after retirement or benefits may be curtailed.
- No possibility of customization. Cannot avail no-claim bonus.
- No tax benefit under Section 80D.
According to a report by the National Sample Survey Organisation (NSSO), the average hospitalisation expenses in private hospitals are 4 to 5 times higher than those one might incur in public hospitals. That alone highlights the importance of ensuring you are sufficiently protected by both personal health insurance and life insurance.
Health is too precious to be at the mercy of the inadequacies of group insurance.
Q4. My husband and I have retired from government jobs and receive a good pension that takes care of our expenses. With the help of our advisor, we have built up a portfolio over a period, and we review it regularly. We do not have any children. We have decided to leave some funds to a few trusts working for animal welfare. We would also like to give gifts to our helper, caretaker, driver, etc. The advisor has been insisting on estate planning. What do you suggest?
Estate planning would ensure easy transfer of funds, a smooth passing of legacy in your absence. Setting this up is not as hard as you may think.
A will is an important legal document. It specifies one’s final wishes regarding distribution of the assets after one’s lifetime. It helps ensure that the assets (financial and others) are passed on to the entities specified in the will without any disputes.
In India, as an example, the Hindu Succession Act, 1956 governs how inheritance happens among Hindus, Jains, Buddhists, and Sikhs. If a male family member dies without a will, the assets are divided equally among the immediate legal heirs. In the absence of immediate legal heirs, the assets are passed onto other relatives. Also, there are other laws, based on religion, that govern investment planning in India.
Very often, individuals do not create a will as it is assumed the assets will be inherited by one’s inheritors or legatees. When you prepare a will, it gives you legal rights and an assurance regarding who will inherit the assets.
In the case of financial assets, we appoint a nominee. However, in the absence of a will, this can be challenged by the legal heirs. In legal terms, a nominee is just a trustee of the financial asset. A beneficiary is a person entitled to the financial asset under the will and is the legal heir as per the law of succession. If the will is signed and executed, it will supersede both the nomination and legal heirship.
Writing and registering a will ensures financial safety of your near and dear ones. A will also help to avoid lengthy, cumbersome processes to acquire the inheritance, and pre-empt any kind of family dispute pertaining to the assets. A will ensures that your assets go to the rightful heirs, those who have taken good care of you when you needed it most.
After your lifetime, you can choose to leave some funds to a cause that you believe in. This gives you a chance to create a positive impact on the society even in your absence. As you want to leave some of your assets to animal welfare trusts, you must state this in your will.
Making a will gives you peace of mind. You do not have to worry about your loved ones after you.
Preparing a will is easy with the help of your advisor. Your advisor can also help you register your will, though registration is not mandatory.
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Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.