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2.
“My
expenses will come down after I retire”
Many
expenses come down, but healthcare and medical insurance costs shoot up.
FOR A lot of people, retirement means a life far simpler than that they led
during their working years. It is also perceived to be easier on the
pocket, as living expenses go down, children become self-sufficient and
most loans are repaid. But many other expenses start creeping up. While
transportation, fuel and household expenses surely come down when one stops
working, medical expenses shoot up as one grows older. Your healthcare
costs are probably negligible in the early stages of your life, but once you
hit 50, these will make a sizeable chunk of your expenses. According to
estimates, almost 70-80% of the total medical expenses incurred by an
individual during a lifetime happen after 70. India’s healthcare costs may
be among the lowest in the world, but they are rising at a fast pace.
Experts say that healthcare inflation is rising at 15-18% each year, nearly
double the pace of consumer price inflation. At this rate, even regular
surgeries like angiography, cataract, appendectomy, etc, will become more and
more costly as you age. The cost of health insurance cover will also see a
rise in the coming years. The premium for a `3 lakh health cover is just
`2,500 a year when you are 30, but for someone above 65, it is `18,000 a
year. Given this scenario, it would be wise to factor in these expenses in
your retirement planning and target a higher sum.
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3. “My employer health cover is
enough”
Group plans are useful, but not enough because of
the terms and conditions.
DO YOU have medical insurance? Most people in the organised sector are
covered by group medical insurance from their employers. While such
covers are definitely useful, they may not be enough. Group plans have
too many strings attached and offer very low cover due to sub-limits on
various heads. A person who depends only on his group medical cover is
never fully covered. Besides, the cover is valid only till you are with
a company. If you are between jobs, you and your family may not have
any cover during the intervening period. The group health cover may
also become invalid if the company fails to pay the premium or if the
insurer pulls out of the contract. In both situations, the employee has
little say in the matter. Moreover, not all employer-provided health
policies offer protection to the entire family. If you have dependent
parents, you will need to buy a separate health cover for them. In
recent years, many companies have cut costs on health care by reducing
the coverage or introducing restrictions.
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4.
“I
can pick winning stocks, so why should I buy a fund?”
Individuals
will not be able to beat a fund manager in the long run.
WHEN MARKETS are on an upswing, as they are right now, everybody becomes an
expert. Even newbies start behaving like stock analysts, and why not? The
stock market has the potential to deliver huge returns and, therefore, many
newbie investors try their hand at stock picking. Many also end up burning
their fingers, but that doesn’t stop them from trying again. If they manage
to earn good returns in the first instance, it is enough to convince them
that they have the required expertise. It encourages them to hunt for more
such stocks. However, the stock market often proves to be a great leveller
and small investors usually end up with losses. There is no harm in trying
your hand at this game, but do so in a cautious manner. Do not get carried
away by a few good stock picks. It might be due to pure dumb luck. Mutual
funds provide a much more convenient route to investing in equities. Though
there is no guarantee that a mutual fund will not lose money, its
diversified portfolio and the expertise of professional managers will
ensure your investment does not fall off the cliff. Yet, small investors
continue to buy stocks directly because it makes them feel as if they are
in control. As one expert has said, if your direct investments in stocks
are able to beat the returns of a mutual fund over the long term, you are
in the wrong profession.
5.
“Pure
term insurance is a waste of money”
It
is more cost-effective than a policy with a maturity value.
WHEN WE make a payment, we are not satisfied unless we get something in
return. This is why it is difficult to convince people to buy a pure term
insurance. In a term plan, the entire premium goes into buying the life
cover and you don’t get anything back. Agents use this feature to brand
term plans as a terrible waste. Instead, endowment policies and money-back
plans are more popular among people, purely because they have a maturity
benefit and offer something at the end of the term. However, by seeking a
return on your investment instead of pro- tection for your family, you are
wavering from the very premise of life insurance. Pure term insurance plan
is the simplest, unadulterated form of insurance. If the policyholder dies,
it pays out the sum assured to his dependants and helps secure their
financial well-being. Other forms of life insurance are
savingscum-insurance products, which give very low cover and charge huge
premiums. As the table shows, a term plan and PPF combo works better than
an endowment plan.
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6. “Bank fixed deposits are the
only safe investment”
Other options are just as safe and offer much higher
returns.
BANK FIXED
deposits are considered the safest investment because they offer
guaranteed returns. While this is true, the obsession with bank fixed
deposits is not warranted. First, these are not completely safe. The
Deposit Insurance and Credit Guarantee Corporation (DICGC) insures
deposits of up to `1 lakh per customer across all branches of a bank.
This means that any deposit amount higher than 1 lakh with a bank is at
risk in the event of default by the bank. Secondly, a bank fixed
deposit is not a taxefficient investment. Don’t underestimate the
impact of tax on your returns. Interest from fixed deposits will be
taxed at the normal rate applicable to you. For a person in the 30% tax
slab, a fixed deposit fetching 9% interest would effectively yield only
6.3% after tax. Keep this in mind before deploying a chunk of your
money in bank fixed deposits. There are now several alternatives to a
fixed deposit, some of which may not be considered safe in the
traditional sense, but are nevertheless lowrisk investments. Tax-free
bonds issued by government undertakings, for instance, are at par with
bank FDs on the safety scale. These offer the same rate of return, but
the income is completely tax-free for the investor, making them a more
tax-efficient investment. FMPs from mutual funds are another
alternative. They offer roughly the same yield, although this is not
guaranteed. However, these are also more tax-efficient as they offer
the benefit of indexation, which reduces the tax to almost nil.
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7. “It is better to buy a house
than live on rent”
High property prices and oversupply mean you can
live on rent comfortably.
A SURVEY of mutual fund investors shows that most of them plan to
invest in property this year . Would that be a sensible investment? If
you are shelling out a huge rent every month, you would probably say
yes. Buying a home seems a better alternative to living on rent and
getting bullied by the landlord every time your lease comes up for
renewal. But consider these points before taking the plunge in the
housing market. A study by Arthayantra shows that buying is not always
a better option. For instance, the high property prices in Delhi make
renting a better option than buying. A 1,000 sq ft property will cost
you roughly 1.1 crore in Delhi, while the rent for a similar property will
be around 25,000 (see graphic). In Mumbai, rents are high but property
prices are higher. According to Arthyantra, even those with an income
of up to 25 lakh a year will find renting more affordable than paying
the home loan EMI. Of course, in some cities, such as Kolkata and
Ahmedabad, the high rents and relatively low property prices make
outright purchase a better option.
Before you buy, you must also consider your
financial position. Where will you arrange the downpayment from? Will
you be able to afford the EMI on the loan? Are you forsaking other
financial goals to buy the house? After your monthly household
expenditure, will you have enough savings for other financial goals?
For someone in the middle income bracket and living in a metro, this is
a highly unlikely possibility. It would be much cheaper to rent the
house than to buy one, despite the high rentals.
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8.
“I
have all the time to draw up my will”
There
is no saying what happens tomorrow. Draw up a will now.
RETIREMENT PLANNING is not the only thing we tend to put off for later.
People also give little importance to estate planning—the process by which
an individual arranges the transfer of his assets to his legal heirs. Why
don’t people take this seriously? For many, the task of writing a will is
best left for the later years, something they can do after retirement. For
others, a will is something only the super rich need to worry about. Both
explanations are flawed. There is just no way to know when a person may
die. That is why we have a multi-crore life insurance industry. If you have
not taken the necessary steps beforehand, your loved ones will have to do a
lot of running around to prove that they are the only legal heirs. They
will have no access to any of the assets that you have meticulously built
up for them over the years. It is wrong to assume that your estate will
automatically pass to your spouse and children, because sometimes other
relatives can also stake claim to your assets. Simply naming a nominee in
your investments will not suffice. Having a will ensures that your assets
are distributed to your loved ones in the way you desire. In fact, you
should make a will as soon as you start building assets. It can then be
revised at any point to reflect any further additions to your estate, as
well as modifying the distribution of assets among the heirs. Just remember
that if you die without making a will, it will cause a lot of inconvenience
to your loved ones. Do not put it off for tomorrow.
SANKET
DHANORKAR ETW140414
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