Thursday, July 30, 2009
Wednesday, July 29, 2009
One of the most classic dilemma facing a retired or soon - to-be -retired person is whether he should use the retirement proceeds to start up some sort of business to keep himself busy while making good money out of it or should he just invest the money in a safe place like bank FD and live off the interest accrued? There are people who would argue in favor of starting up something on ones own using the money while there are equally good number of people who think otherwise.
So, what is the right decision or rather which is the better option? Well , I think there are no right or wrong options here . Both the options have their own merits and demerits , but, I would stick my neck out in favor of one option. But before I do so , let us examine the pros and cons of both the options :-
OPTION 1 - STARTING UP A SMALL BUSINESS
- The first and foremost benefit of starting a business after retirement will mean that the person will be able to productively employ himself or herself. This is a big consideration since there are numerous cases where people feel left out and are unable to cope up with the feeling of being unemployed . Sometimes retired people can suffer from depression if they are not doing anything productive. Having a small business or shop etc can easily help them stay active both physically and mentally.
- Business does offer chance of making more money than the retired person will get from bank FD.
- Business, if successful, can turn into an asset which he can pass on to the family thereby creating wealth not only for himself but also for the whole family.
- Starting up a business always has an element of risk associated with it. Generally the success rate of start ups is not more than 10-15% and as such the thought of putting one's retirement proceeds into starting up a business may not turn out to be a wise decision.
- To be successful in business one requires different type of skills than what one requires to be successful in a 9-5 job. Hence, it is increasingly difficult for retired salaried people to start up a business and turn it into a success. One can however overcome this challenge by hiring experienced person with the respective domain knowledge . One would also need to learn from experience.
- The trauma of failure may not be the best thing for a retired person to handle considering that the time that he has to make a success out of the business is much lesser than a young businessman starting out in life. Retired person will have much lesser headroom and time to make mistakes and learn from it .
OPTION 2 - INVESTING IN SAFE INSTRUMENTS AND LIVING OFF ITS INTEREST
1. The biggest advantage of this option is that one will get enough time to enjoy one's retired life as he will have plenty of time to do things he always wanted to do. Many people never manage to find time to attend to their hobbies in their working life time and as such this option will give them that option post retirement.
2. Another very important factor for a retired person is the safety of his capital. Since the retirement proceeds is all the money a retired person has, it is prudent to invest it in an instrument which has minimum to zero risks associated with it. This option of investing in Bank FD, Post Office Monthly Income scheme, Senior citizen savings scheme etc offers retired person exactly this benefit.
3. Since health also is major concern in old age, the fact that the person will not be required to do any physical activity ,unlike in case of starting up a business, is also a big plus .
1. The strategy on living off on interest income has a limitation that the interest income does not increase with inflation and the over a period of time inflation can reduce the real income in the hands of the investor.
2. The income generated out of interest alone will not be anywhere near the income a successful business can generate.
After going through both the pros and cons of the two options , I think it is always better to play safe adopt the second option viz investing the retirement proceeds and living off the interest income. The compelling reason for this is the fact that one must attach highest importance to the safety aspect of the retirement proceeds since this is the last sum of money the person has. As such he can not take any risk with this money . Investing it in safe instruments will give him modest income and considering that a retired person has almost no liability , this should suffice. And in case a person is worried about inflation eating into his interest income over a period of time, then he might consider investing part of his sum in equity based well diversified mutual funds. The superior returns from these mutual funds will guard the investor from ills of rising inflation.
Monday, July 20, 2009
These are good times for rich people. People who are affluent have many advantages and privileges in general life. An addition to their long list of privileges is the availability of term insurance at a much cheaper rate.
The term insurance premiums have seen drastic reduction recently for life cover of RS 1 cr and above. Even term plans having life cover of Rs 25 lakhs and above also have seen quite a large reduction in the premiums. This large scale reduction in the premiums is attributed to the following reasons:-
1. Better mortality rates - The recent experience has shown that the mortality rate isn't as bad as is shown in the mortality chart currently being used. And as such the premiums have come down owing to this.
2. Access to better health care and lifestyle - Rich and HNIs have greater access to health care and quality lifestyle which also plays a role in increasing the life span of the person. This in turn means lesser claims on insurance companies pushing the overall premiums down.
3. Wider coverage - Since insurance primarily is based on the concept of "risk sharing" with increase in the number of people under insurance cover , the premiums to be paid to make the whole exercise viable, also comes down. With more and more people getting in the insurance ambit in India, it is expected that insurance premiums might see some more downward movement going forward.
Today, one can avail of a LIC term policy with a sum assured of Rs 1cr for an annual premium of nearly Rs 25,700-32 ,000. But unlike LIC whose rates are available to most buyers, Birla Sun Life has stringent underwriting norms and the rates are available to only those in the best of health.Term insurance is a cover where the only benefit is a payment if the insured dies during the term of the policy is the most basic form of life insurance. The cover is now almost a commodity with web-based aggregators offering quotes from all insurance for term protection.