Eternal vigilance is the price of liberty. Our armed forces guard our borders so that the nation can sleep in peace. But in the process they often end up neglecting their finances.
Regular transfers and a high-stress job that demands a lot, both mentally and physically, leaves little time for money matters. While their lifelong medical requirements are taken care of, other aspects of their finances get neglected. Many fall prey to mis-selling by unscrupulous agents that saddle them with expensive life insurance policies.
Take the case of Gurugram based Colonel Purushottam Kumar (retd.). He retired from the army in 2015 after three decades of service. In 2001, he was mis-sold a Unit Linked Insurance Plan (ULIP). The premium allocation charge (charges deducted by the insurance company towards the agent’s commission and other charges, the rest being invested in the policy) was 20 percent. Compared to this, mutual funds charge only about two percent.
Kumar has been managing his own investments since 1991. He prefers doing his own research and investing in equities and mutual funds. Aside from his ULIP fiasco, he says he has managed his investments “quite well.”
Moneycontrol spoke to several financial advisors, including some former defence personnel who have built a successful financial practice after leaving service, on how our soldiers can secure their financial future before it is too late. Here is what they had to say. Have a liquidity component in your portfolio.
Financial advisors suggest keeping aside a minimum of six months’ expenses, including monthly loan instalments and regular investments. Prableen Bajpai, founder, FinFix Research and Analytics says, “Park this sum in a sweep-in fixed deposit, or a liquid mutual fund, and keep adding a small amount to this fund each month.”
As a daughter and wife, Bajpai has seen army life very closely. She understands its hardships and challenges, especially those that come with regular transfers.
The money kept in the fund can come handy for high-priced household purchases, like taking a house on rent till quarters are allotted, and children's school admission expenses at new stations, among other things.
Having a liquid corpus ensures that you are not compelled to liquidate your long-term investments when you need extra funds.
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Involve your spouse in financial decisions
Postings in distant locations often keep officers away from the family. So it is important to keep your spouse involved in money matters. Always open a joint investment account which can be operated by any one of you or the survivor. Let them take financial decisions on your behalf in consultation with your financial advisor.
Do not invest in multiple properties
Bajpai says that another frequent mistake that many in the armed forces make is that they buy multiple properties. “Give property-related decisions enough time and thought,” says Bajpai.
“Avoid investing in property to save tax or just for rental income,” says Major Ashish Chadha (retd.), CEO, Chadha Investment Consultant. The income from rental property is taxable, and it does not give healthy returns. Chadha served in the army for 11 years, then started his firm in 1995, when he was 31 years old.
Gurugram based Col. Purushottam Kumar (retd.). The 61-year-old has been investing in equities for long-term wealth creation.
Avoid unwanted insurance products
Do not buy insurance-plus-investment products like Kumar. There are high mortality charges, premium allocation charges, etc., and returns are low on maturity. The insurance cover you get from such products is usually 10 times the premium amount. Thus, if you pay a premium of Rs 50,000 annually, you will only get a cover of Rs 5 lakh.
Bajpai says, “army personnel subscribe to the Army Group Insurance Fund (AGIF), which takes care of their insurance.’’ Depending upon the rank, the insurance cover ranges between Rs 50–75 lakh.
“The insurance cover provided by AGIF can be complemented with a pure term plan, depending on the liabilities (such as a home loan) and dependents in the family,” says Colonel Sanjeev Govila (retd.), CEO of Hum Fauji Initiatives, a financial planning firm. He suggests halting the renewal of the term policy after the liability is over and children are financially independent.
Since they get pension after retirement, there is no need for a separate pension plan. Permanent commissioned officers — i.e., those with 20 years of service — get lifelong pension.
“Given the Ex-Servicemen’s Contributory Health Scheme (ECHS) and the availability of medical facilities, health-related expenses will hopefully not be a big strain on your finances,” says Chadha. Hence, a separate health insurance for ex-defence personnel and their family is not required even after retirement. But Kumar suggests having a separate health insurance policy for children after they turn 25, because the ECHS does not cover children beyond that age.
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Ensure cash flow post-retirement
Kumar wanted to set up his own interior decorations venture in Gurugram after retirement. So, before retiring, he estimated his income and expenditure post retirement.
After retirement, his earnings would include pension income, and returns from his business and investments. His expenses would include the monthly expenditure required to maintain a comfortable lifestyle, an annual foreign vacation, and upgrading his car every five years.
Like Kumar, armed forces personnel should evaluate their cash flow closer to retirement, and then at least once every year, to look for any major changes in income and expenditure.
“Under post-retirement income, you can include your pension if eligible, income from other job or business, and returns from investments (dividends, rental income, etc.),” says Atul Shinghal, founder and CEO, Scripbox.
He adds that one must account for large one-time expenses such as children’s higher education, wedding expenses, buying a property to reside in after retirement. If employed with the forces for a shorter duration, one should consider the impact of inflation on a long post-retirement life (30-40 years). That should give one a fair idea of one's financial position post-retirement.
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Invest beyond DSOP for retirement
Just like civilians contribute a part of their monthly salary to the Employees Provident Fund (EPFO), services personnel contribute to the Defence Services Officers Provident Fund (DSOP).
This is one of the best ways to build a corpus for buying a house and the requisite liquidity post retirement. “As a youngster in the armed forces, this should be one’s starting point. Get a decent sum deducted each month, and increase the subscription over your service tenure,” says Bajpai. She adds that DSOP subscription is eligible for tax deductions under section 80 C, therefore there is no need to invest in any tax-saving instrument.
DSOP offers 7.1 percent per annum at the moment. With inflation at around 7 percent these days, the length of your retirement can have a big impact on your retirement finances if you invested only in DSOP during your service tenure. It is important to create a portfolio of equity mutual funds for long-term goals, such as a child’s higher education and a quality retirement life.
Kumar started investing in blue-chip stocks from 1991. Later, he began investing in equity mutual funds. He counts his investments in select large-cap and flexi-cap mutual funds as among his best bets. The good part is that he has been a patient investor all along, through market ups and downs. Over the years, he has built a tidy corpus thanks to equity investments.
In sum, Shinghal explains: “A Rs 20,000 SIP in a good equity mutual fund can potentially grow to about Rs 1.5 crore over a 15-year period. This is assuming a 10-plus percent growth rate, and increasing your SIP by 10 percent each year.”
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