6 Big Retirement worries!
When I speak to well informed and educated investors (and advisers) the biggest retirement income worries seem to be the following:
Market volatility, Regulatory changes, Medical expenses not covered by their medical insurance, Inability to maintain a complex portfolio beyond a particular age, Inflation and poor financial understanding.
All these fears seem to be valid, and I realised that there is really nothing I can do about it:
1. Market Volatility: I could write a 500 page book on this, but it will not help anybody. If you quit your job at the start of a fantastic bull run, you are damn lucky and if you retire at the beginning of a bear market, you are damn unlucky. There is really nothing else to do. I have solved this for people by creating 3 different buckets of investing 0-3 years, 3-7 years, and >7 years. This has worked well for the past 22-23 years.
2. Regulatory changes: In a country where there are enough communists and socialists inside every right wing party, please expect and be ready for dividend tax, capital gains tax, estate duty, aggressive wealth tax – and what have you. I really shudder to think what it can do to most of the portfolios that I am advising. People will get chewed. Prayer is the only solution.
3. Medical expenses not covered by insurance cover: this could be anything – I have never professed to understand General Insurance (like Medical). The policy drafts are too cumbersome. I have a policy from New India and I hope that by the time I am making a claim my good track record will ensure that all kind of niggles and major operations are covered. Keeping good health and lots of prayer is the only solution. I am yet to find a sensible general insurance adviser. Keeping fingers crossed, praying and keeping good health habits is the only solution.
4. Inability to maintain a portfolio of stocks, fixed deposits, mutual funds, fixed maturity plans, insurance plans, annuity plans, ..is not easy. By the time you are 65 (especially if you do not have kids or they are unwilling to learn or help) you should have only one mutual fund scheme, one bank account, one medical plan, one savings bank account, one credit card. Anything more complex your mind may do a suboptimal portfolio management. Finding a trustworthy helper is likely to be a nightmare – especially in a country without any chance of controlling the thieves running around!!
5. Inflation: Many people worry about inflation dropping down, and interest rates going up. This is a very rare event, but preparing for interest rates to be around 4-6%p.a. and inflation to be around 7-8% is a realistic level of planning. This actually means you will not be able to go to a zero equity portfolio till your age of 80 seems to be a given 🙂
6. AS you go on in life you read words like ‘Core and Satellite’, ‘Term Insurance with return of premium’, ‘Systematic Investment Plan in direct equity’ – are all meant to either make you buy a sub-optimal product or worse con you off your money. This can be easily avoided by increasing your financial knowledge…and yes saying NO to every product that is offered to you. Simple.
Of course Praying helps.
Jayant
Too good article. My parents and their age group is going through most of this already. Specially medical insurance problems. The time when you really need medical insurance, they check you thoroughly and exclude all those ailments for which you need a medical treatment. Ironic !
subra
What is ironic? How can ‘insurance’ cover what is ALREdy there? Insurance is for a contingency. If people wait till they fall ill and then take insurance…it is their FAULT, not the insurance industry’s.
aclarke
Amazing article !. Thanks. (It is #2 which is really scary for me as it is absolutely out of our control)
prabe
Subra,
Is the concept of having Core and Satellite portfolio not worth it.
I keep Large and Large&Mid Cap MF in Core were i add about 60% of my savings and Multi,Mid&Small Cap MF in Satellite were i add about 30%.
I am 25.I have 100% savings in Equity.My only Debt are EPF(12% of my basic),PPF(500/year) and a RD &Liquid fund holding my Emergency Fund.
Is this approach not worth it?
Apurva Gandhi
Subra, great article. This would bring out people out of their imaginary castles in air (those who already think that the corpus is good enough for them)
May I also add other two fears during their retirement? Namely,
1. Running out of money
2. Children cannot or may not be in a position to take care of them during their retirement age, both in physical terms and financial terms.
Also the fears would have varied degree of impact at their respective ages – Pre retirement/post retirement and those whose nest egg is almost gone.
bharat shah
i am a retiree , departing shortly from only son’s family, having no current income, having total worth @ rs. 30 l including a house @ 25 l, preparing finance planning for next 20 yrs. or so by adopting your suggestions:
1.I have solved this for people by creating 3 different buckets of investing 0-3 years, 3-7 years, and >7 years. This has worked well for the past 22-23 years.
2.By the time you are 65 (especially if you do not have kids or they are unwilling to learn or help) you should have only one mutual fund scheme, one bank account, one medical plan, one savings bank account, one credit card
3.Of course Praying helps.
LuckyOye
Medical insurance in India is a big eyewash. In a way its good, it forces people to save and put aside money for a medical emergency as well as allows people to get services as per their paying ability, not some third party.
Here’s the eyewash…if pre-exising conditions are not covered, then shouldn’t I pay lesser premium than a person for whom it is covered? Today, the premium is fixed as per age, but exclusions are as per pre-existing conditions…that’s a one-way street in favor of insurance companies.
Another eyewash is the limit on certain cases…for example, a normal pregnancy delivery is fixed at a certain limit..no matter what the services are actually costing or if there’s any complication of the child post birth. The newborn baby is not covered at all till 1 month!
Finally the eyewash of certain insurance companies treating new conditions as pre-existing conditions when policy comes up for renewal. I don’t know how many do this, but rumor has it that this shady behavior is practiced by many of the profit-seeking private medical insurers. Such companies should be immediately taken to court and have their license cancelled.
Then the 3rd party healthcare managers for cashless hospitalization. This marriage-divorce-marriage-divorce between insurance cos and 3rd party managers will drive anybody nuts!
One thing Subra is completely right about…prayer and good health habits are the best thing. Pray not just for good health, but also pray that in case of a high hospital bill there’s a decent human actuary who will pass your hospital bill with minimum cuts.
subra
bharat shah
History bias is a problem! what worked in the past 30 years may not work for the next 30, please remember.
Krish
Health insurance is made so complicated in India, it requires a lot of research. From premium payments, what it covers, exclusions, nearest hospitals and its list, track record, protocols of claims settlement, medical declarations and tests, comparision among players to find which is best takes whole lot of time. For some information, the rep has to confirm from multiple sources and also consumes time.
If we dig deeper, we realise that most of the policies are biased and certainly would not come to the rescue of the policy holder in times of need.
Sanjay
Hi Subra Sir
In sl no 6 I can understand Term Insurance with return of Premium and Systematic Investment Plan in Direct Equity, dont make much sense, but what is wrong with having Core and Satellite approach while investing in Mutual Fund for a long time? Even all MF experts and Gurus even Dhirendra Kumar of Valueresearchonline also suggest that.
could you please elaborate?
Regds
Sanjay
subra
most fund houses concentrate all managerial efforts on a few of their funds. For ex say Hdfc concentrates on Top 200, Prudence and one MIP scheme. You are much better off being in these 4-5 schemes instead of putting money in all their sundry schemes.
even if you have done a C and S kind of strategy, check what impact is it having in your returns. Experts have a vested interest in increasing the no. of schemes as much as the industry.
Rajeev
Subra,
There are people who worry and then there are people who do.
In life there are uncertainities and these continue even after you retire. Indians are better off as compared with the western retirees. We never hada welfare state and are therefore betre prepared. I have seen that Indians in foreign contries carry the same traits of saving for old age. We do not spend all our earnings throughout our working life.
Indian middle class has surplus income which is saved in forms of PF /PPF /Superannuation etc. some go to equity.
I feel better education is needed to make people aware of the risks in financial well being. The blogs such as this help but are limited to a few who read it.
I appreciate the efforts done by you.
I follow the policy of investing in different domains, real estate, gold, debt and equity (MF & stocks). I must say, that after starting to read the net based information, my understanding has gone up. Best to read a lot and believe only what you feel is correct.
Regards
T K VANI
Subra,
Many people are afraid of themselves-Spending more on holdiays, giving lavish gifts to children,Grandchildren etc in their old age,living very long, falling sick for which no insurance coverage is allowed, even though they have good savings. Often people feel safer when they receive a indexed pension in lieu of all their savings.I have knowledge of even low level government employees receiving Rs.20000 as pension while PSU and private sector mid level managers who received around Rs.8 lakhs as retirement corpus in the early nineties see a huge erosion in the value making it difficult for them to live a decent life without children’s support. (Recently the government paid a huge arrears – some of the officer level cadre people got Rs.8 lakh arrears)
Manickkam
Subra,
There are so many things out of our control. You have clearly listed down the most common things on the financial side.
Suresh
Health insurance is a funny creature. Corporates get renewal with over 100% incurred ratio because its big ticket. Retail gets ripped. Thats because retail has not clout. One more example of the rich (corporate) being subsidised by the poor (retail). Naturally insurers try to cut corners to balance their book – result – the fight for pre existing. How ever many customers never read a policy document and never ask whether the insurance will cover an actual emergency.Caveat Emptor. Finally the whole TPA business is a big rip off – only because TPAs try to make money from hospitals instead of cutting costs. In fact Apollos of this world actually have a TPA arm and insurance arm so they control the value chain. Welcome to the real world.