Republic Day financial planning: Why our armed forces must look beyond DSOP for retirement

What could be financial freedom from the context of the Armed Forces?

Financial Freedom is as much a state of mind as it is a state of wealth. In this context, the ability to worry less about money, both during your serving years and especially post-retirement are important. Being assured that you have put your hard-earned money to work for you, for the long term, is essential. As is often heard, well begun is half done, so get started early and invest with a purpose.

Also read: How members of armed forces must plan their personal finances

While Financial Freedom is a completely individual outcome, there are some common best practices, everyone should adhere to.

Define income and expenses (now and into the future)

An important step you should consider for your financial planning is to define your real income inflow and outflows - post-retirement. Your Inflows should include your pension, salary income (if you have opted for/ plan to opt for a job after retiring from the armed forces) and investment returns (interest, rental, dividends, capital gains etc.), while your outflows should account for both regular expenses of maintaining a comfortable lifestyle, vacations, child’s education etc. and one-time large expenses such as weddings, car and house upgrades, international education (if planned) etc.

It is important that you account for the impact of inflation and for a very long post-retirement life (at least 30-40 years). Given Ex-Servicemen Contributory Health Scheme (ECHS) and the availability of medical facilities, health-related expenses will hopefully not be a big strain on your finances.

This should give you a fair idea of your financial position post-retirement.

Also read: 9 personal finance commandments that those in armed forces must follow

Invest in Inflation-beating instruments for the long term. Retirement can last for as long as you have served in the armed forces.

You will, or have already served in the armed forces for 20-30 years. Post-retirement life can last for at least as long. With inflation being what it is these days (5 percent-6 percent plus), the length of your retirement period can have a big impact on your retirement finances.

Yes, your pension gives you a margin of safety but if you want to maintain quality of life and truly enjoy retirement, you need to think beyond.

This means thinking beyond what you have considered “safe” investments, such as your fixed deposits.

We do realise that most people, as they get close to retirement, move a large portion of their assets into fixed income products such as fixed deposits or provident funds primarily to protect their capital. The returns on this capital is what they depend on to provide for their regular expenses in retired life.

But in your case, the assurance of a pension and medical care mean that you can take on more calculated risk and realise much greater growth from your investments. You should have a higher allocation to equities in your portfolio.

A higher growth rate is needed because a retired life spanning decades needs investments that stay well ahead of inflation. What you thus need is equity as it has a proven history of beating inflation.

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 percent plus growth rate and increasing your SIP by 10 percent each year.

Go beyond your pension, Defence Service Officer Provident Fund (DSOP), and commutation.

Not just retirement, but a comfortable one

If you keep in mind the steps described above you can ensure a sound sleep for yourself just the way you afford the rest of us when you serve the country.

(The writer is Founder and CEO of Scripbox)