Filling Gaps the Gaps
By Dipak K. Mondal
TIPS TO LOWER FINANCIAL STRESS WHEN YOUR PARENTS ARE ABOUT TO RETIREIT MIGHT have passed as a non-event, for you were preoccupied with life, career and family. Retirement of parents can come quietly, without stirring your finances. Or, it may throw up many questions with a long-term bearing on your budget, investments and sundry other financial matters. Your parents ended their working years with a big fund, a home and dream of living comfortably. Life, though, can be cruel. Old age comes with its share of problems— diseases, faster-than-expected erosion of wealth, children fighting for financial legacy, etc. These can be a drain on your finances too if you do not plan in advance. Taking care of parents in their old age is not just a financial but also an emotional issue. You can’t ignore either. Lastly, how you deal with your parents’ retirement will be a learning experience that you can use to plan your own retirement. As we talked about the possibility of parents’ retirement throwing up tough questions, here are a few questions whose answers may help you plan your finances in a better way.
HAVE THEY SAVED ENOUGH?
A lot depends upon the answer to this question. If you have access to the internet and patience to look for a retirement fund calculator, it’s easy to see if your parents have saved enough to last their post-retirement life.
Find out if they have saved enough. If not, see if they have time to reach the goal. Is yes, increase savings, if necessary, and invest a part of the funds in risky instruments such as equities that can give higher returns. You also need to brace yourself for extra savings to support your parents in later stages of their life.
DO THEY HAVE HEALTH COVER?
Health could be your parents’ biggest expense after retirement. Given the sharp rise in health costs (15-20 per cent a year), it is likely that a lot of money will go towards medical expenses as your parents age. If your parents have health insurance, they have saved you and themselves many hassles. This is because few insurers are happy to cover people after they cross the age of 50. “Each insurance company goes by its underwriting principles and uses discretion to accept or reject a particular risk. Generally, insurers reject applications when they find that the applicant’s health is adverse with respect to their underwriting guidelines,” says Antony Jacob, chief executive officer, Apollo Munich Health Insurance.
But can you include them in your family floater policy? Yes, but doing so will increase costs substantially, as premiums for family floater plans are based on the age of the oldest family member. Besides, many insurers do not cover parents who are more than 65 years old in family floater plans.
But there is a way out. Many health insurance companies have special plans for senior citizens. These usually provide cover for life, but are very expensive. “If your parents do not have health insurance, they can buy a policy for senior citizens. It may be expensive but will be worth it,” says Suresh Sadagopan, a certified financial planner and founder, Ladder7 Financial Advisors. For senior citizens, the cover should be on the higher side. So, buy each parent an individual cover of `3-5 lakh and add a top-up cover of up to `10 lakh. A cover of `5 lakh for a 60-yearold will cost between `17,000 and `29,000 a year.
You can claim income tax deduction up to `20,000 if you are paying premium for your parents’ (if they are above 60) health insurance. This is besides the `15,000 deduction for premium paid to cover self, wife and children. This means you can claim tax deduction up to `35,000 every year on account of health insurance alone.
You must also build an emergency fund to take care of your parents’ medical needs.
ARE THEY INVESTING WISELY?
The two factors that must decide where the retirement money is invested are regular income and safety. Also, it makes sense to ensure that the tax outgo is reduced as much as possible.
Monthly income scheme/plans: If your parents’ pension does not cover their expenses, they can invest a part of the retirement fund in monthly income schemes (MIS) of banks and post offices. These offer guaranteed monthly income, unlike mutual funds’ monthly income plans (MIPs), which do not guarantee regular monthly dividends. The post office MIS is offering 8.4% interest at present.
“The immediate impact of retirement is on monthly income. Analyse whether parents’ expenses can be met by their existing investment plans, pension plans and assets. If not, you can look at MIPs or post office MIS,” says Mahesh Tadepalli, financial adviser and head of research, Arthayantra.
Life insurance annuity products: These give regular income. You invest a lump sum with an insurer, which pays you according to the existing rate of return. The payment frequency can be monthly, quarterly or yearly. The rates are benchmarked to medium- to long-term government bonds.
Senior Citizen Savings Scheme (SCSS): It is for people who are at least 55 years old. It can be another source of regular income, though interest payments are quarterly. The present rate of return is 9.2 per cent. It keeps changing according to the interest rates in the broader market. The maximum amount that can be invested in the SCSS is `15 lakh. The tenure is five years, extendable up to three years. While life insurance annuities and the SCSS offer tax deduction benefits under Section 80C, their returns are not tax-free.
The remaining funds can be invested in safe instruments such as bank fixed deposits, public provident fund, tax-free bonds and debt funds. Life insurance: If your parents have life insurance plans, get rid of them. They do not need life cover as they don’t have big financial liabilities at this stage. “Parents usually have no financial responsibilities and have sufficient money to take care of their post-retirement needs in the form of pension or a big corpus. If this is the case, they should get rid of their life insurance policies. Instead, they should increase the medical cover,” says Shilpi Jain, a certified financial planner.
You must also ensure that they do not invest their retirement funds in life insurance products due to reasons mentioned earlier. This is because investments in insurance products are illiquid and have long tenures. In fact, if you have to support your parents after retirement, you will have to factor in that cost. This necessarily means increasing your life
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