No matter how nuclear our families get, children are expected to look after their parents in a large number of families in India. It makes sense to be prepared if your parents are going to fall back on you.
Last year, the Bacchan starrer Baghbaan won accolades at the box office. The story wasn't a new one - the usual tale of children quarrelling over who should take care of their old parents. But still it struck hearts. No matter how nuclear our families get, children are expected to and do look after their parents in a large number of families in India.
Building a corpus
A recent AC Nielsen-ORG Marg survey revealed that 65 per cent of Indians are not even thinking about how to survive in their old age. Only 10 per cent of all Indians save for old age.
Another 10 per cent are covered through mandatory pension and provident fund schemes. Eighty per cent do not have adequate savings for their old age. So chances are that most families would have dependent elders. In such a scenario, it makes sense to be prepared even before the dependency starts.
Twenty-nine-year-old Sanjay Khodse is doing just that. Sanjay lives in Pune with his wife, child and parents. He has started to take over the reins of the family business from his father, who plans to retire in the next 5-6 years.
"My parents will continue living with me and I will take care of a large part of their needs and expenses."
Certified financial planner Kartik Jhaveri suggests, "The strategy here would be to apportion a good part of your parents' and your income, pool them in together and build a corpus using aggressive investment strategies."
The question is - how much does 'good part of income' mean? Another certified financial planner Gaurav Mashruwala recommends, "A good indicator would be to invest the amount that your parents spend every month on their own expenses."
Here it is important to exclude certain expenses, which your parents would not incur on a regular basis once they have retired. One example would be conveyance expenses while traveling to work.
Once you have arrived at that investment amount, Mashruwala suggests an allocation of 30 per cent in equities and the rest in debt. But of course, the allocation would depend on your risk taking ability. If you are an aggressive investor you could push up the equity component.
Certified financial planner Zankhana Shah gives a yardstick, "At least have debt exposure to an extent that it can provide you for 5 years of retirement period. This reduces your overall risk due to unpredictable equity markets", she says.
An important part of this is to arm yourself with adequate insurance. Remember that not only are your wife and kids dependent on you but your parents as well. This warrants a quantum increase in the amount of insurance cover you would need.
While keeping in mind your child's future you would also need to think about your parents medical needs.
Investing the corpus Jhaveri says, "Once the corpus is built totally or is built to a certain extent, income support can be initiated for parents and the shortfall could then be filled in from your income. That way they have income support plus the stress on your own personal goals gets reduced significantly as well."
What that means is that you must invest the corpus to generate income to meet their daily needs. If there is a shortfall, you ought to pitch in the difference.
Here's how you can invest the corpus:
|
Instrument |
Interest rate |
Tax impact |
Lock-in |
| To meet liquidity | |||
|
Savings Account |
3.5% |
Interest is taxable |
No lock-in |
|
Routine expenses | |||
|
Senior Citizens Saving Scheme |
9% |
Interest is taxable |
5 years |
|
Post office MIS |
8% |
Interest is taxable |
6 years |
|
Mutual Fund MIP |
Varies |
-Dividend is tax-free -Short term capital at marginal rate - Long term capital gains tax @ 10%/20% |
No lock-in |
|
Annuity from LIC |
6.5% onwards |
Annuity is taxable |
Minimum 5 years |
|
For medical needs | |||
|
Mediclaim insurance |
NA |
Claims not taxable |
NA |
|
Floating rate funds |
4-5% |
Same as Mutual Fund MIP |
No lock-in |
| For long-term needs | |||
|
Bank Fixed Deposits |
5-6% |
Interest is taxable |
7 days onwards |
|
Infrastructure Bonds |
5-6% |
Interest is taxable |
3 year onwards |
|
National Saving Certificate |
8% |
Interest is taxable |
6 years |
|
Equity mutual funds |
Over long term 15-18% |
-Dividend is tax-free -Short term capital gains tax @ 10% - No long term capital gains tax |
No lock-in |
Moreover it is important for you to ensure that all their needs are met while at the same time saving them the embarrassment of asking for money. These small steps can help:
- Add their share of expenses to your household budget
- Buy common groceries together and pay the bill yourself
- Open a bank account exclusively for your parents and transfer regular sums to the account every month
- Give them an ATM card they can access
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