How to plan for a wealthy retirement

[sejwaldeepak]

How to plan for a wealthy retirement
March 27, 2006 10:33 IST

Retirement planning is a relatively simple exercise that requires investing discipline and, regular monitoring. It is important to make a start; however small it may be.

Before we get on with discussing the case study on retirement planning, it is important to highlight what it is:

1. a very personalised process that is unique to every individual;
2. an ongoing process because what we are aiming at is not fixed (our standard of living, which we are aiming to secure will change over time).

Our aim therefore in discussing this case study is to understand how you can get started in planning for your retirement. For you to be able to draw up a personalised retirement plan, you will require the services of a financial planner.

In this note, we will discuss the retirement planning process of an individual, say Ajay. Ajay is 30 years old; he is married and has a two-year-old child. He is a professional, employed in a software services company. He draws a compensation of Rs 30,000 per month.

His wife too is employed, as a teacher. She draws a salary of Rs 15,000 pm. The present household expenditure is Rs 30,000 pm. Ajay is looking to retire at age 58 years.

Since we are focussing on retirement planning for Ajay and his wife, we need to look at the cost they incur in maintaining their present standard of living. Let's assume, Ajay wants to, as of today, maintain the same standard of living post retirement, i.e. he will need Rs 30,000 per month (pm), adjusted for inflation, on retirement.

Therefore, we have to plan Ajay's investments in a manner that they will yield an income of Rs 30,000 pm, 28 years from now.

Post-retirement, other than regular monthly expenditure Ajay will incur expenditure on travel and healthcare. Given that health costs are rising fast and we are traveling more for leisure, it is prudent to set aside some money for these purposes.

We have assumed Ajay will require Rs 500,000 per annum post retirement (Rs 125,000 p.a. in today's Rupee terms after adjusting for inflation).

Another head of information that will be required is Ajay's present savings and the rate at which they are expected to grow over the years. These savings could include balances with the Employee Provident Fund (EPF), mutual funds, savings-based life insurance policies and fixed deposits among others.

The house that Ajay owns and lives in will not be added to his existing assets for the purpose of retirement planning. This is because he lives in the house and will not be able to generate income by way of rent or sale of property at the time of retirement.

Finally, before we get down to the numbers, we will need to make two assumptions:

the average rate of inflation for the next 28 years;
the low risk rate of return you can earn 28 years from now; at 58 years of age your risk appetite will be low and therefore a bulk of your investments will be in very low risk securities that yield regular income.
While it is difficult to say with certainty what the actual inflation and rate of interest will be, we nevertheless need to have a starting point. In our view, an average inflation rate of 5% p.a. is a reasonable estimate. As far as the rate of return is concerned 28 years down the line, we think it will be about 5% p.a.

It is important to restate at this point that retirement planning is not a one-time exercise. As your standard of living changes and the investment environment evolves, you will need to regularly make adjustments to your plan so that you can achieve your objective.

Therefore, these assumptions too will change over time and Ajay will need to accordingly make adjustments to his saving and investment pattern. It should be understood that Ajay's financial advisor will have an important role to play in the reassessment.

Let's now take a look at the retirement planning solution for Ajay (see table).

We have taken three scenarios depending on the profile of the client. The third solution (Small Savings) has been included to show how any retirement portfolio that is almost entirely focused on investing in schemes like EPF, NSC and post office is likely to perform over time.

The methodology we have adopted is that Ajay will aim to accumulate a corpus which when invested in low risk securities on retirement will yield the desired income. So, the Rs 30,000 p.m. now is equivalent to about Rs 117,600 28 years from now (post-inflation).

To earn this income (Rs 117,600 p.m.) at a return level of 5%, the amount that is required to be invested is about Rs 3.82 crore (Rs 38.2 million).

In Case 1, we discuss a scenario where Ajay is 'aggressive' while making his investments, i.e. he takes on high risk with the hope of earning higher returns over the tenure of investment. A 15% p.a. compounded return is what we have assumed in this case.

If the money is invested in instruments which can yield such a return, then Ajay will have to either make a one-time investment of Rs 513,500, or a monthly investment of Rs 6,100 throughout the tenure.

In Case 2, the only difference is that the assumed return on investments is lower at 12%; so the investment required to meet the objective is higher at about Rs 1,350,000 (one-time) or Rs 13,400 (monthly).

Case 3 is not really an option but something what a lot of investors are unconsciously opting for. A lot of their savings are in such schemes despite the fact that returns have declined sharply over the years.

While the returns are attractive, from a long-term perspective of 28 years they do not compare well with the other options (like equities).

This is apparent from the table where a portfolio comprising predominantly of post-office schemes is a poor performer as compared to a portfolio that comprises other riskier assets.

Of course, returns offered by small savings schemes are guaranteed; but at the same time in case of PPF and EPF they are reset every year, i.e. the return is not fixed. Moreover, at the time of maturity, it is likely that the return offered by such schemes will be lower than what it is today.

Therefore the rate at which the money is rolled over will be lower, reducing the overall returns. Having said that, such schemes should form a small part of any long-term portfolio, on the basis of their highest level of safety.

Once Ajay has a fix on the amount he wishes to set aside to meet his retirement needs, he will need to identify exactly which assets to invest in. If he is opting for an aggressive portfolio, he will have to decide which stocks/equity funds/ULIPs to invest in.

Some ideas are discussed in this guide; we recommend that you finalise your portfolio only after discussions with your financial planner.

As is evident from the table, retirement planning is a relatively simple exercise that requires investing discipline and, regular monitoring. It is important to make a start; however small it may be.

[sunitahooda]

This is very important information shared with all...thanks a lot.

[manu14]

thanks a lot deepak bhai
frankly speaking till today i have never understood this investment plans though i have invested in a few mutual funds, provident fund etc.
but all done by my banker & i have never understood whenever he tried to clarify what he is doing
but u have cleared most of the doubts in one go may be u know ek jaat ka dimaag rupiye paise ke baare me kis tariyah samjhe ga
thanks again
paar taam phaas bhi gaye eeb te koi bi iss baare me keeda hoga na te aa loonga tere dhore
tc & keep giving ur piece of knowledge to mhare jissa te

[deepakchoudhry]

Hi Sejwal Bhai,

Thinking about pension is a very good thing esp when we are in late 20's or early 30's.

And considering Indian Growth for next 10 years it is a good time to invest.

You can have policies and pension funds but nothing can beat the real estate investements in terms of equity or generating income eg monthly rent.

Though it is always good to engage a Finance professional when choosing and investing with policies or pension funds...but always and always read the small prints.

Also few things I would like share, which I have learned and try to follow over the years.

Golden Rule 1 : Never have your eggs in one basket.

Golden Rule 2: Do your own research

Golden Rule 3: Keep yourself ahead in the Job market, e.g. regularly Invest in acquiring new skills

Golden Rule 4: Assess your personal achievements and make plans every year.



Deepak

[deepakchoudhry]

thanks a lot deepak bhai
frankly speaking till today i have never understood this investment plans though i have invested in a few mutual funds, provident fund etc.
but all done by my banker & i have never understood whenever he tried to clarify what he is doing
but u have cleared most of the doubts in one go may be u know ek jaat ka dimaag rupiye paise ke baare me kis tariyah samjhe ga
thanks again
paar taam phaas bhi gaye eeb te koi bi iss baare me keeda hoga na te aa loonga tere dhore
tc & keep giving ur piece of knowledge to mhare jissa te

Manish Bhai.

Most of us have gone all through this mind set....but make time to know.

Money saved is money earned.

Everytime you feel you dont want to appraoch the bank manager ..think will you give 500 rs to anyone who will ask for it...I'm sure the answer is "No" so why keep giving it a Person called Bank Manager.

And if you feel you have made wrong investments...Get out...pronto.


Deepak

[rkumar]

First of all, take out this concept of retirement from mind. There is nothing like retirement. This is totally a western concept. How come a person who is fit till mid night of his 60th birthday, can become unfit to work next morning? Best way to live (not retire) is to remain physically and mentally fit and work whole life. That is the only surity to live happily. My prescription to all of you would be;

Invest you savings into rural agriculture land and move over to village when you finish your job in city. Build a nice small home at your farm. have few cows/ buffalos and work hard at your farm..grow your own vegetables... this will keep u all fit and happy... Visit city home once every few months ... Don't think of millions at all...u won't need them... savings alone cannot keep u happy...you will need physical activity/ work also. Your pension can be good enough to supplement your other needs..... Cary back your wisdom to villages... Villages will gain and you will gain... Look at the picture and see foryourself if one really needs lots of money to sleep peacefully...

RK^2

[devdahiya]

First of all, take out this concept of retirement from mind. There is nothing like retirement. This is totally a western concept. How come a person who is fit till mid night of his 60th birthday, can become unfit to work next morning? Best way to live (not retire) is to remain physically and mentally fit and work whole life. That is the only surity to live happily. My prescription to all of you would be;

Invest you savings into rural agriculture land and move over to village when you finish your job in city. Build a nice small home at your farm. have few cows/ buffalos and work hard at your farm..grow your own vegetables... this will keep u all fit and happy... Visit city home once every few months ... Don't think of millions at all...u won't need them... savings alone cannot keep u happy...you will need physical activity/ work also. Your pension can be good enough to supplement your other needs..... Cary back your wisdom to villages... Villages will gain and you will gain...

RK^2



TRUE WORD BY WORD Rajinder bhai jaan.............One may die in present, accumulating [too much] for future......and who knows what is there in store for us in that FUTURE. Live in present and Save a little.

[manu14]

Manish Bhai.

Most of us have gone all through this mind set....but make time to know.

Money saved is money earned.

Everytime you feel you dont want to appraoch the bank manager ..think will you give 500 rs to anyone who will ask for it...I'm sure the answer is "No" so why keep giving it a Person called Bank Manager.

And if you feel you have made wrong investments...Get out...pronto.


Deepak
thanks a lot bhai sahab u r right
m just in beginning of my career will improve in this & will keep a track
& now i know i can ask u people, take advise from u all, thanks for ur valuable advise & kind support
regards
Gulia

[deepakchoudhry]

Raj Ji and Dev Bhai sahib,

Firstly retirement is just not a Western Concept, It is very much a vedic philosophy too......ie four stages of a Human Life.

Retirement does not mean individuals cannot contribute. At 60 or 65 People can still contribute to society if they choose to.

Retirement is also good because it allows young blood to come into the system....It is essential to maintain a healthy social order.

Now we cannot apply Vedic Varanasharm 100% as the times have changed....but on the other hand we can plan about it according to our own circumstances.

And Yes you are right, one need not worry too much about these things and forget about the present...but we should definatly plan and work to secure the future, whatever and wherever that might be.

In old age economic freedom makes life a bit more comfortable and one can live with self respect.

The physical reality of the outer world cannot be denied.

And we should be encouraged and taught about retirement (at the right time of course). I know in GE(UK) they have courses for people who are just about to retire.

I know I have a bit of long way to go yet and I might be wrong...but these are some my thoughts.

Regards,

Deepak

[deepakchoudhry]

thanks a lot bhai sahab u r right
m just in beginning of my career will improve in this & will keep a track
& now i know i can ask u people, take advise from u all, thanks for ur valuable advise & kind support
regards
Gulia

Hi Manish,

I'm no expert but I suppose we can throw Ideas into our thinking hats and come up with solutions.

Deepak

[sejwaldeepak]

Planning to retire? Buy mutual funds

March 29, 2006 15:02 IST

Any investor with a long-term investment plan for retirement cannot give equities a miss. And any investor who plans to invest in equities cannot give mutual funds a miss. That is why mutual funds have a critical role to play in your retirement planning portfolio.

Mutual funds and retirement planning have enough points in common to make them perfect for each other. Consider this -- retirement planning is about investing for the long- term, at times for even longer than 35 years.

Mutual funds (equity-oriented funds to be more precise) are also about investing for the long-term. This is because equities as an asset class are best equipped to 'deliver' results over the long-term. Over the short-term they can be extremely volatile and may even erode your retirement savings.

There is little doubt that equity funds can help you achieve your investment goals. But for that to happen, you need to be invested for the long-term; at least 10 years in our view from a retirement planning perspective.

If you are saving for retirement by taking the equities route you will need advice; and we mean advice from experts and not tipsters, brokers, television channels or magazines for most of whom long-term means the next hour, next day or next week.

When you have money in equities you need someone to constantly monitor the stock markets, the economy, interest rates and various domestic and global factors that are likely to have an impact on your investments.

Given the enormity of the task it is easy to appreciate why managing equities is a full-time job. This is where mutual funds come in. Mutual funds usually have investment teams that seek investment opportunities in the stock markets on a full-time basis.

This is something that as an investor you may attempt to do on your own, but may never have enough time or capability for given your personal and work commitments.

Having highlighted the benefits of long-term investing in equities, we would like to draw your attention to another critical aspect of retirement planning, i.e. asset allocation.

Asset allocation is very important when you are deciding on your retirement portfolio. We have seen instances where stock market slumps have lasted for over 20 years. During that period, investors with above-average allocation to stocks witnessed significant erosion in their portfolios.

On the other hand, investors who had diversified their assets across avenues like bonds, gold, property and cash, managed to stay afloat and in some cases even clock reasonable returns. That is what asset allocation is all about; it allows investors to benefit from a well-diversified portfolio that helps them exploit opportunities and cut losses across ups and downs in the various asset markets.

Despite the relatively smaller domestic mutual fund industry, you can be sure that selecting the best mutual fund schemes for retirement is a challenge.

There are several reasons for that -- for one the industry has too many schemes within each category with little separating one from the other. And second, there are too many unscrupulous agents trying to milk their commissions out of unsuspecting investors by talking about the most irrelevant, but high commission paying, schemes. The irrelevance is even starker, when you consider the schemes from a retirement perspective.

So what is the best way to identify the mutual funds that must find their way to your portfolio? To be sure, there are ways to spot the right mutual funds; and the good news is that with a little bit of homework and some help from your qualified investment advisor you can be as good as anyone else at it.

1. Systems

Pick up any business daily today and the one headline that is likely to hit you is about a fund manager leaving an AMC (Asset Management Company). If you are invested in that mutual fund then the first question that will come to your mind is -- what should I do now?

You are not alone; we get a barrage of emails and calls from investors when a star fund manager leaves his job to join the next mutual fund, or these days, a hedge fund.

In some cases, it's downright unfair to the investor when he invests in a 'new fund offer' (NFO) because of a star fund manager, only to find the news of his departure being leaked once the NFO period is over.

Our advice to you -- don't get married to your fund manager. Instead pick an AMC based on its investment processes and systems and not its star fund manager.

Process-driven AMCs adopt a team approach (as opposed to an individualistic approach), which tends to de-risk the exit of an individual leaving the team. When you are selecting a mutual fund make sure that it has well-defined investment processes that can function well even in the absence of a particular fund manager. We do not expect investors to have access to this information as easily as we make it out to be; that is where your investment advisor/mutual fund agent comes in.

Ask him about the processes and systems adopted by various AMCs. If his advice is based on solid research and not commissions then he should be able to answer a lot of your questions on this topic.

2. Track record

Once you have identified an AMC with well-defined investment processes, you should check its track record. Typically, equity fund performances must be monitored over at least three years in our view and from a retirement viewpoint, over 10 years.

Some times you have a relatively new AMC like Fidelity Fund Management for instance, (with an established track record in other markets) that can't be gauged on the minimum 3-year track record. In such a scenario it makes sense to dig a little deeper and find out what its achieved in other markets, its systems and processes and what kind of experience they have in managing domestic stocks.

Even for mutual funds with longer track records, it is important to consider how it fared during a market downturn, which is what separates a good fund from an average one.

Once you have identified an AMC for its team-based investment approach, look for some signs that show its approach works. The most obvious place to verify this is in the performance. An AMC with systems in place is likely to have its funds perform in a typical manner.

For instance, if an AMC has a process that ensures its equity funds are very well-diversified in terms of stocks and sectors, then these funds will counter a market downturn much better than their concentrated peers.

Also over a period of time, there will be a degree of consistency in the performance of the AMC's equity funds. While evaluating an AMC's equity schemes it is important to consider the volatility and risk-return parameters.

Well-managed equity funds tend to have lower volatility which is reflected in lower Standard Deviation numbers over time. Likewise, they have higher risk-adjusted returns, which is reflected by higher Sharpe Ratios.

3. Go for funds with well-established track records; avoid NFOs

When you look at the domestic mutual fund landscape you see too many funds that have little relevance from a retirement planning viewpoint. A lot of them are thematic funds that, to begin with, do not have much of a track record.

Moreover, when you are planning for retirement over a 20-30 year period, it is best to ignore themes and go for funds that invest across stocks and sectors without any bias. We believe that over the long-term, thematic fund performances are likely to be more erratic than consistent.

There will come a time when the theme will have run its course leaving the fund manager with a truncated list of investment options. That is why it is best to invest in an equity fund that targets 'capital appreciation' -- plain and simple, and not 'capital appreciation through opportunities in outsourcing/capital goods/infrastructure/consumerism.'

Remember if theses themes really merit investment then even the conventional equity fund manager is likely to invest in them. But the advantage he has is that he can exit the theme once it loses steam, unlike the thematic fund manager who has to remain invested in adherence to his investment mandate.

Another thing to avoid is NFOs, not that we have anything against them, but a lot of NFOs that are being launched presently are of the thematic fund variety. If there is an NFO of the 'conventional' variety, then we would recommend you evaluate it on the first two parameters.

[sejwaldeepak]

Our preferred AMCs

Having researched mutual funds for more than eight years, our mutual fund research team has grown to prefer some AMCs over others. Their performance, track record and processes are the main attributes that caught our eye. Of course, that is not to say that others do not have them; it's just that we have short-listed the three that we like the most.

1. HDFC Asset Management Company

HDFC Asset Management Company is a joint venture between HDFC (50.1% stake in HDFC AMC) and Standard Life Investments of UK (49.9%). It was launched in September 2000. While its performance took a while to kick off, there was no mistaking its well-defined investment processes and systems.

Today, it has some of the better performing funds across the diversified equity, tax-saving, balanced and monthly income plan (MIP) segments. Contrary to popular perception, its best funds are a mix of the erstwhile Zurich India Mutual Fund (which it took over in 2003) as also funds launched by it since 2000.

The fund's team-based investment approach is apparent from the fact that even with a star fund manager like Prashant Jain in its midst, there are several other equity fund managers managing various funds that compare well with their peers.

2. Franklin Templeton Investments

Launched in 1996, Franklin Templeton Investments is among the more well-established names in the mutual fund business. It acquired Pioneer ITI in 2002 and became one of the leading fund houses in the country with some of the best equity funds and an experienced and proficient equity fund management team.

The fund house pursues a team-based, process-driven investment approach, something that came to their rescue when their Chief Investment Officer -- Debt quit last year.

3. Sundaram Asset Management Company

Sundaram Asset Management Company is among the more conservatively run AMCs in the country. A pointer to this fact is that its funds rarely feature in the rankings; it is equally true that they rarely disappoint investors. As a matter of fact, over the years investors have come to expect a certain degree of consistency and stability in their performance.

Like with the other AMCs we like, Sundaram Mutual Fund has a team-based system in place. Recently BNP Paribas acquired 49.9% stake in Sundaram Asset Management Company, thereby bringing down the Sundaram Group stake to 50.1%.

Our interaction with the AMC indicates that this is unlikely to have an impact on the fund management style of Sundaram Mutual Fund's schemes.

[sejwaldeepak]

How insurance helps you retire happily
March 30, 2006

Life insurance plans form an essential part of any financial planning exercise. The same holds true while planning for retirement. The good news is that there are various insurance policies that help individuals plan for retirement.

This article explains how individuals, with the help of life insurance, can prepare themselves for the golden years of life.

Simply put, the purpose of life insurance is to indemnify the nominees/dependants of the insured against an eventuality. There are two kinds of insurance plans, which fulfil this purpose i.e. savings-based plans (endowment/endowment type plans/ULIPs) and term plans. Let us begin with term plans and the role they play in the retirement planning exercise.

Term plans

A term plan is what is generally termed as 'pure risk insurance'. In such plans there is no savings component, and hence they are very affordable (a 30 yr old healthy male could get a Rs 10 lakh (Rs 1 million) cover for 30 years for just Rs 4,000 p.a!).

The benefits accrue to the nominee in case of an eventuality to the policyholder. Naturally, there are no maturity benefits in case the insured survives the tenure.

Term plans: High on value, low on cost!
See the attached Screetshot.

A term plan plays an essential part in retirement planning. It helps the individual to focus on the retirement planning exercise without having to worry about the 'financial condition' of his nominees/dependants in his absence. It does this by providing for a large sum assured at a lower cost, which can help take care of finances in the absence of the breadwinner.

One can also opt for add-on riders with the basic term plan policy. A term plan is particularly useful in case the individual has bought a pension plan from a life insurance company 'without life cover'.

Ideally, a term plan should be bought by an individual for the maximum tenure available. The maximum tenure available as well as the premium charged differs across insurance companies. Individuals would do well to check these aspects before finalising on such plans.

The earlier a term plan is bought, the cheaper it turns out to be. Having said that, it is never too late to buy a term plan.

Savings-based plans

These plans differ from term insurance in one primary aspect - they also provide for a maturity amount if the individual survives the tenure of the plan. That is because the premiums charged by such plans also include a savings element. The savings portion is invested by the life insurance company to generate returns, which the individual receives on maturity.

Savings-based insurance plans play an important role in the retirement planning exercise. They help individuals build a corpus for retirement.

This becomes necessary keeping in mind that individuals would have stopped working at that age and a regular income stream like salary won't be available. On the other hand, the retiree will continue to incur regular expenses.

Other important factors like inflation and higher medical expenses would also have to be factored into the equation.

Various kinds of insurance plans are available to help individuals build a nest egg for retirement. Pension plans and regular endowment plans fall in this category. Let us take a look at regular endowment plans (pension plans have been dealt with separately in this guide). An illustration will help in understanding this point.

Endowment plan table
See the attached Screetshot.

Suppose an individual aged 30 years, insures himself for a sum of Rs 500,000 for a 30-year tenure. As can be seen from the table, the premium he will pay for the same is about Rs 12,500. In case of an eventuality, the nominees will get the sum assured i.e. Rs 500,000 plus the additions/bonuses (if any) till date.

In case the individual survives the tenure, he stands to get Rs 791,000 (calculated @ 6% compounded annual growth rate- CAGR) Rs 1,610,000 (calculated @10% CAGR) on maturity.

However, it must be understood that the return figures are really not as impressive as they are made out to be. Returns are not calculated on the actual premium paid. Instead, they are computed on the premium after deducting expenses.

In the illustration (refer Table 2), the actual return on premium works out to approximately 4.45% CAGR (for the 6% return figure) and 6.26% (for the 10% figure) respectively.

The figures will differ across insurance companies. Individuals need to evaluate their options before they finalise on an insurance company.

For example, as is apparent from Table 2, in case of Company B, the actual return is different as compared to Company A (4.91% CAGR for the 6% return calculations and 7.61% CAGR for the 10% return calculations respectively). The return declared by a life insurance company depends on how well it manages its finances and controls expenses.

Conventional endowment plans invest premiums in bonds and government securities which is why the returns are so subdued. This is where unit linked insurance plans (ULIPs) can help.

The primary difference between ULIPs and traditional endowment plans is their investment mandate and flexibility. ULIPs have a mandate to invest premiums (upto 100%) in varying proportions in equities or in debt. Individuals also have the freedom to shift their monies from equity to debt and vice-versa in varying proportions.

We believe that ULIPs (powered by equities) are equipped to offer better returns over the long term. And since retirement planning is a long-term activity, investing in ULIPs would hold individuals in good stead.

However, individuals should note that investments in ULIPs should be in line with their risk profile and their overall asset allocation.

Clearly, life insurance is an important tool for any individual planning for retirement. However, as we have highlighted, this exercise must be conducted after assessing one's investment objective and needs. This will ensure you are not caught wrong-footed in your golden years.

[sejwaldeepak]

Mediclaim: A must for retirement
March 30, 2006 11:08 IST

Medical science has advanced by leaps and bounds in the last few decades. It has also brought along with it, an increase in the average life expectancy. According to a leading life insurer, 'life expectancy is likely to rise from 77 years to 85 years over the next decade.'

In such a scenario, there's a definite need to cover for unforeseen medical expenses during the individual's working years.

This in turn, will ensure that his long-term finances will not take a hit in case of major medical expenses in his latter years.

Also with a greater number of individuals moving out of the joint family system, this will ensure that retirees are better equipped to fend for themselves when faced with medical expenses. This is where medical insurance comes to the rescue.

Simply put, medical insurance -- or 'Mediclaim' -- helps an individual cover the unforeseen expenses incurred due to injury/hospitalisation.

In addition to providing for the expenses, it also covers expenses sustained before as well as after hospitalisation. All this, it does at a very small cost to the individual. An illustration will help in understanding this better.

Medical insurance: A must for retirement planning
see the attached screen shot.

The premium quotes given above are inclusive of service tax and education cess.

The premium quotes are as given on the websites of the respective companies and only indicative. Individuals are advised to contact the insurance company for further details.

Let us take an individual aged 30 years, wants to cover himself with medical insurance for a sum of Rs 300,000. The annual premium he will have to pay in case he decides to opt for New India Assurance Company is Rs 3,796. Conversely, if he decides to buy 'Mediclaim' from ICICI Lombard, then the premium amount he will have to shell out is Rs 3,100.

In case of hospitalisation, the expenses that are incurred will be taken care of by this policy subject to the limit of the cover. The cover will be to the extent of the sum assured of the policy.

This cover will also take care of pre as well as post-hospitalisation expenses like money spent on buying medicines and conducting medical tests. Of course, the reimbursements of expenses are subject to conditions.

While planning for retirement, individuals don't want to be in a situation where they have to face a huge medical bill and haven't planned for it. Unplanned medical expenditure could compel an individual to dip into his retirement savings thereby disturbing his financial plans.

Medical cover is also available by way of opting for the 'Critical Illness Rider (CI)' alongwith a life insurance policy. Life insurance companies cover a specific number of illnesses. If an individual suffers from the specified illness, then he stands to benefit from the CI cover.

Both the CI riders as well as medical insurance are entitled for tax benefits under Section 80D for premium payments of upto Rs 10,000 per annum. This limit stands enhanced to Rs 15,000 in case of senior citizens.

Tax benefits are also available in case of dependents. Section 80D benefits are in addition to Section 80C benefits.

However, individuals need to note that there is one basic difference between Medical insurance and the CI rider. In case of medical insurance, the individual is covered only to the extent of the actual expenses incurred on medicine/hospitalisation (up to a maximum limit of the sum assured).

This is unlike the CI rider where the entire amount of CI cover is paid to the individual. This payment is irrespective of the actual expenses incurred by the individual.

From a retirement planning viewpoint, it is therefore important that individuals take into consideration unforeseen expenses. Especially when the costs are low and the benefits high!