Choose wisely – Annuity options for retirement

ideal retirement image

The hard-earned retirement corpus secured in accounts such as the NPS, PPF, and/or the EPF is the final nest egg for public or private sector individuals who retire after a few decades of continuous service. While certain central government retirees are eligible for pension and lumpsum fund benefits, almost all the private sector employees are not entitled to a pension from their employers and have to fall back on lumpsum (defined contribution plan) corpuses.

As a result, the post-retirement monthly expenditures of the family, most often, depends on corpus inwards from such accounts. There are two important considerations for such corpus inward for individuals – Safety and return on such corpus since this impacts the amount of derived pension on the same for the rest of the life.

Upon retirement, most individuals rely on traditional plans such as a combination of fixed deposits, Sr Citizen savings Schemes and/or plain vanilla Savings accounts to create cash flows for longer duration and this raises several risks of the safety of corpus, interest rate risk and thereby risk of variability of periodic cash flows and the possibility of hardships during retirement years.

Annuities – Should be the first choice for retirement corpus

Annuities should be the preferred choice for retired individuals; however, this product is not very popular due to lack of awareness, perceived lower rate of returns and liquidity issues. Annuities offer the best hedge against the variability of cash flows, against interest rate risks and consistent cash flows for most of the living life.

Today annuities offer a wide range of choices which were not available 5-10 years ago. Flexibility, market comparable rate of return, and wide range of options are available from over half dozen annuity service providers. Besides this, regulations and oversight of annuity providers make this product extremely safe as compared to other market-linked products.

A quick glance of the variety of options from annuity service providers is summarized as below.

Table 1: Choose the option wisely
Annuity for lifeAnnuity for life with return of purchase price on deathAnnuity payable for life with 100% annuity payable to spouse on death of annuitantAnnuity for life with a provision for 100% of the annuity payable to the spouse of the annuitant for life on death of the annuitant, with return of purchase price on the death of last survivorAnnuity payments would be made to the annuitant and his/ her spouse throughout their lifetime. Thereafter, these pay-outs would be made to the subscriber’s mother and after her, to the father. On death of the father, the purchase price would be refunded to the annuitant’s child/ nominee.
Source: NPSTRUST.org.in

 

Which option makes sense?

This depends upon a variety of factor and the retired individual’s objective, dependents, and other personal factors. For instance, for couples with no dependents the easiest choice would be to choose option 1: Annuity for life. Here, they are likely to enjoy higher cash flows or put in lower corpus to enjoy required cash flows. The standard of living could be higher for such couples since this option pays the highest pension as compared with other plans across annuity service providers. Options #2 and #3 might suit retired couple with legal heir (children / grandchildren) where they might want to gift such corpus earned.

Option #4 & #5 could severely impact the current cash flow for the retired individual since the objective is to return the corpus. Unless there is adequate liquidity and other assets these options defeat the very purpose of buying an annuity and therefore can be avoided.

Housewife’s guide to managing money

The Indian household has an unwritten rule – that the quintessential home maker is the home minister (and perhaps also the Prime minister) and the bread earner being the default finance minister – the husband or the Karta of the house. Now while this has been as normal for an Indian middle-class household; an aspect that has remained hidden through times old and new is the fact that this home maker has always been juggling amongst many roles that she does with great alacrity is also that of being a finance manager.

This aspect seldom comes out since it has never been the main job of the homemaker; her main job has always been to run the operations, human resources, food & beverages, travel & transportation, education, social & media, entertainment, design & development and many more. The one department that is run without much hullabaloo is the finance department since it is the domain of the Karta. Now we are not really stereotyping as modern women have come of age with their finances but generally, women financially aware too willingly pass this domain since there is the main rudder to take care of.

Having said this, the home maker does a silent function in the domain of finances for any household and the following roles as a finance manager ought to be taken as seriously by persons running their personal finances.

Role of the liquidity manager – in this role the home maker’s ability to manage two types of liquidity challenges, depending upon situations need highlight. The tactical one and the strategic one. In the tactical situation the ability to manage the month end low liquidity by having kept reserve cash from previous month’s surpluses, side pocketing and deep valets needs special mentioning. In the strategic situations, the ability to thus dig for hidden side pockets to tide over immediate high demand for funds by dipping to savings / local chit fund activity and access to peer network for deficit funding are extremely crucial. This role is under appreciated and such techniques though widely known are hardly used by individuals in the households who are in-charge of finances. We would go to the extent of saying many frontline money managers seldom use these basic practices and thus end up becoming sitting ducks. So, pat the home maker for this crucial but underappreciated role.

Role of the Risk manager – this is the supplementary role of the liquidity manager for the family. In fact, the role of being a risk manager is of greater value than being a liquidity manager, since being a risk manager averts major catastrophe that might befall a family. During such critical times, the ability to tide over the financial crises becomes foremost. In this role of the risk manager, the homemaker – by methods of side pocketing, hidden box savings and above all, diversifying the savings and investment pattern can significantly control risk. A case in point here might be the penchant of buying physical gold (ornaments and/or coins etc), silver etc. on a recurring basis (festivals / functions) which has been accumulated over a long period adding to significant reserve. This helps to tide over a financial crisis. This apart, the home maker’s ability to stick to basics on managing personal finances are fundamental part of risk management. On this count too, in general, home makers score higher marks on managing financial risk for a family.

Role of the planning and budgeting department – this role come as naturally to homemakers as fish take to water. Be it managing finances on a day to day basis, or for functions and special occasions. Planning and managing the budget however tight things might become is one aspect that seasoned finance manages need to learn. How do home makers, plan, anticipate events, the expenses and prepare for the occasions is something that needs to be inculcated by all. However, small or miniscule the cash flow or cash at hand might be, the home maker would fit the expense to suit the budget at hand. Tactics such as bargain hunting, discounting skimming, substituting and many other methods come quite naturally to them. Individual can learn a lot from them in terms of how budget and expense management should be done.

Role of the financial planner – this role therefore is a logical end to all the things that the home maker does on a routine basis. The ability to think strategic when it comes to financial planning are worthy of note. For instance, planning for retirement and keeping dry powder for a rainy day is something could come by instinct we believe. Though home makers might not be consciously planning the goal planning activity but at a sub-conscious level there is always keeping the retirement planning and kitty building or coaxing to do the same. So, don’t ignore that sane advice. Second, the shorter yet important goals like keeping aside money or accumulating the same for her children’s education even if it means doing spending cuts on other expenses are done with purpose.

So, look around you and you will find a home maker who has done all the above and more. It is time to learn the nuances of how and why things are managed and there are over a dozen things to keep in mind while you do your own financial planning and achieve your financial goals. Just remember the two rules. Do the basics just as the home maker does and concentrate on the various roles she does to find out how it is clicking.

Lessons from the CoVID 19 Lockdown

The CoVID19 pandemic and the consequent lockdown has brought in a humbling experience to many of us, including individuals and/or businesses thought to be foolproof of themselves given their indispensable nature of product or services. Barring food and dailies (groceries) none of the presumed basic services needed to mankind have become affected adversely. Alas, none has been spared. The neighborhood barber/salon or the cobbler who mends shoes right up to liquor barons (barring regulatory risk) and would have thought to be proof from any eventuality have faced different levels of threat during this pandemic. India’s service economy which is almost 2/3rd of the GDP has taken a massive hit. At the business and at individual levels, the lessons the current crisis has have been of very basic nature. On the principles of “risk management” most of the lessons that this crisis offers are rudimentary. A quick look at basic lessons from this crisis.
Cash is King
We need to write this title in large and bold font in our minds and actions. Cash if the blood of any business and a key element of an individual’s personal financial wellbeing. Without enough cash businesses freeze or worse, go bankrupt. Without cash, an individual’s household can face immense hardship and probably make or break the family and household. The current crisis has brought out this basic element of money management to the fore. Many businesses (large and small) and individuals all are strapped for cash during these times, however, people who had planned for crisis level reserve for cash would emerge out of this crisis stronger and would be able to grab opportunities crisis’ bring after they pass. So, what is the lesson from this crisis to us all? Keeping reserve or emergency cash/liquidity, always, is as basic as it should be. For a business, 3-4 months of cash burn should be available to tide over during such unforeseen times, and similarly for individuals, 4-6 months cash for expenses should always be kept at call. People who followed this golden rule will find it easier to tide over the current situation without much hassle.
Health is Wealth
This again is as basic as one can understand. Health is not acquired without effort. To remain healthy – physically and mentally, individuals must put effort into eating good food, resting enough, and working out physically. Similarly, for mental health, individuals require attainment of inner peace, sound conscience, and a positive attitude. All the above is easy to attain if the practice of working towards it is regular and not when the crisis is on the horizon. The second aspect of health is a risk. The first part was risk mitigation by doing many things as explained earlier, the second and the most important part is risk transfer. Despite all the care and work on your health, it could be possible that your health is compromised due to reasons beyond your control; risk transfer helps you to cover health failure without any financial damage. The best form of risk transfer is “health insurance”. And to plan for the same when there is time is again a basic thing to do. Individuals should be prepared to pay a small cost to cover himself/herself and family from any health eventuality. The health risk is real. Recognize and prepare for the same without delay.
Multi-tasking is underrated
The CoVID19 crisis has taught this one thing – one more time. Specialists are overrated and generalists are underrated. The crisis has been easy for generalists. Everyone who depended on a specialist for everything from household chores, outsourcings kitchen (and cooking), and technical staff and many more things, have been rendered faced with a big handicap. People who could easily mold and become a self-service oriented person are having a relatively easier life during this crisis. Multi-tasking on the home front or office front should be the way forward. Cooking, housekeeping, fixing the small things, doing office duties with minimal help and above all ability to learn quickly – technical as well as basic stuff is the key to ever remain relevant. The faster one learns this the better prepared he/she is for the current and future crisis.
Upskilling has no age bar
Why is it that suddenly everyone is rushing to get enrolled for the online course? That is because nobody knows what kind of skills the world would demand, in 2021. People are rushing to upskill/upgrade their knowledge for the fear of being left out once the world re-opens. While that might sound a good thing to do, upskilling and staying relevant is a continuous process. It does not start during the crisis and ends when the world is normal. Leaning a new skill does not have an age bar. To stay productive and relevant an individual must repeatedly upskill and upgrade continuously. This way, the person would be the sought-after individual when the normalcy returns. Corporate / businesses are looking at human talent that is ready and easy to plug/play during difficult times. Upskilling/upgrading requires time and an individual should set the same aside regularly and not just when crisis hits the horizon.