Backdrop:
For a person who is just retired say, at the age of 60, financial independence becomes crucial. This is because there is no fixed recurring future income or cashflow whereas he / she has to take care of him / her and may be spouse too, for remaining period of life say, for another 10 to 15 years considering the average life expectancy in India. Even if one has children, dependence on them on a continuing basis is not a viable option.
Absence of any social security mechanism or health care system in India makes the situation more precarious for many elderly people particularly from lower income group. Stress of financial dependence is one of the primary causes of mental anxiety among many elderly people.
Under the above scenario, there is a need for a sound financial planning.
Strategies for a sound financial plan:
One cannot become financial independent overnight. For that a medium to long-term planning is needed. This is more important for an individual who will not be getting pension on retirement.
1. Financial planning before retirement: This should be crafted properly during working life and should result in a corpus whose interest should be more or less adequate to cover financial needs of the individual and / or dependent spouse for remaining period of life. Financial needs should not only cover monthly normal expenses for living but also unanticipated medical expenses. As the body suffers wear and tear as we age, medical expenses can, sometimes, be unanticipated and high.
2. Financial planning after retirement: Financial planning should continue after retirement as well as there may be need to shuffle investment depending on risk return profile of the same. Majority of senior citizens are either risk neutral or risk averse. They would, therefore, like to investment in fixed deposits of banks. However, over a period time, returns of FDs have come down significantly and therefore, it may be advisable for them to invest a significant amount in alternative schemes like Senior Citizen Saving Scheme (SCSS) and / or Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both are good in term of return with marginal differences in terms of liquidity. Considering high risk, we would suggest elderly people to avoid investing in share market other than through select and appropriate Mutual Funds. A small portion of the surplus funds available with them (10 to 15 per cent) may be invested in such funds. It is, however, always suggested that they go through an expert advisor if they are not well-versed with nuances of capital market.
3. Medical insurance: Usually for a person beyond 60 years, premium is quite high for majority of medical / health policies. An elderly person should, therefore, weigh pros and cons before taking a medical policy. Other parameters like brand name, past experience of settling claims, availability of cashless facility, other pointers like non-availability of insurance for pre-conditions should be studied at great depth before purchase of any health insurance.
4. Residential options: If an elderly is staying at a big house one may not require and the person is finding in a cash crunch situation, he / she may explore possibility of shifting to a small rented place or an old age home by selling or renting out existing house.
5. Reverse mortgage: This one more option for a senior citizen to get cash. Under this scheme, a senior citizen (age 60 plus) can mortgage his / her unencumbered residential property to a lender (bank) and a get a specific amount from the lender for a specific period of time (max 20 years). Amount to be received from the bank depends on value of property, age of borrower and prevalent interest rate. Further, the borrower is under no obligation to repay the loan during his / her life time if he / she chooses to continue to stay at the house. After death of the borrower, his / her spouse (co-borrower) can continue to stay till his / her death. After demise of both the co-borrowers, loan could be adjusted after selling the house.
6. Writing a Will: It is always advisable to make a comprehensive and transparent Will so that legal heirs are aware of the property / assets they are inheriting. Property is one of the root causes of disputes in our families and therefore, the elderly person needs to leave a clear Will which is transparent, equitable and justified.
Conclusions:
Financial planning is very important as it gives some direction to life style and disease management of an elderly person. It will also help in smooth transition of assets / property to next generation. All elderly people should, therefore, always resort to sound principles of financial planning.
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