Pension, ECHS and Retirement Corpus

Having adequate financial resources and knowing how to use them are two quite different things.

Your Pension Is a Bigger Asset Than You Realise

For most superannuating officers, pension is sufficient to take care of the normal monthly expenses of a couple. It also enjoys a significant advantage over most other retirement income sources: Dearness Relief (DR, the retirement equivalent of DA), which is periodically revised and provides some protection against inflation.

Think about what this means.

A civilian retiring with Rs 2 crores but without a pension may have to depend on that corpus for almost every monthly expense. An Armed Forces officer with the same corpus and a reasonable pension starts from a very different position.

This is something I find many officers do not fully appreciate while deciding where to invest their retirement benefits.

If your pension already meets your regular expenses, why should your entire retirement corpus be invested in products primarily designed to generate more monthly income?

Some additional income may certainly be useful, depending on your circumstances. But the more important requirement could be to make your corpus grow for future needs rather than keep distributing its earnings for consumption.

Of course, DR does not guarantee that your pension will keep pace with every expense, particularly healthcare-related costs outside covered treatment, lifestyle changes and large family commitments. But it gives you a financial foundation that should be used intelligently.

ECHS: Another Advantage That Changes Retirement Planning

Medical expenses are among the biggest financial uncertainties faced by civilian retirees. A serious illness can upset years of financial planning, especially when medical insurance becomes expensive or inadequate at older ages.

We have ECHS (Ex-Servicemen Contributory Health Scheme), which provides substantial medical support to eligible veterans and their dependants. I consider it one of the major strengths of Armed Forces retirement.

This does not mean that every medical expense or inconvenience disappears. Access to treatment, travel, emergencies, non-covered expenses and the needs of children who are now not covered under ECHS but still being supported by you may require financial preparedness.

However, it does mean that our retirement corpus need not necessarily carry the same medical-cost burden as that of a civilian retiree without comparable healthcare support.

When pension and ECHS are considered together, an officer’s financial position can be quite strong. It may also permit a more sensible allocation towards long-term investments, subject to individual needs and risk tolerance.

Unfortunately, these advantages are frequently ignored when officers receive generic investment advice from various sources including financial advisors ignorant of these realities.

Then What Is Your Retirement Corpus Really For?

This is only an illustration, but the situation will be familiar to many.

Consider an officer retiring with Rs 2 crores. He may want to spend Rs 60 lakhs on a house purchase or major renovation and settling down, earmark Rs 25 lakhs for children’s pending requirements, and keep another Rs 15 lakhs for a vehicle, travel and foreseeable family commitments.

An Illustrative Retirement Corpus of Rs 2 Crore

That is already Rs 1 crore accounted for.

The remaining Rs 1 crore must now be planned for a retirement that could extend another 25-30 years or longer.

This does not mean those expenditures are necessarily wrong. It means their combined impact must be understood before commitments are made.

Now consider that a goal costing Rs 10 lakhs today could cost nearly Rs 18 lakhs after ten years at an assumed 6% inflation rate. Over longer periods, the difference becomes even more substantial.

There are therefore two equally important questions.

How much of your corpus can you afford to spend in the early retirement years?

And how much must remain invested, with an appropriate balance of safety and growth, for your later years?

The answers cannot come from somebody else’s investment allocation.

The Mistake of Treating All Retirement Money Alike

I frequently see officers treating their entire retirement corpus as one large sum requiring one investment decision.

Some feel that everything must be absolutely safe, while others are persuaded towards products promising high returns. Still others buy another property because that is what they are comfortable with or have heard about for a major part of their investing life.

The difficulty is that different portions of your corpus have different purposes.

Money required in the next two years cannot be invested in the same manner as money intended for use fifteen years later. Funds earmarked for children’s education cannot be treated like money meant for long-term family wealth. And money intended for your spouse’s security deserves particular care.

A good retirement plan should tell you how much money is required, for what purpose, at what time, and how it should be invested until then.

This is also why I consider a proper retirement financial review much more useful than merely reviewing which mutual fund or FD has performed better.

What Should You Do Now?

If you are approaching retirement, I would suggest that you sit down with your spouse and answer three questions:

1. What Will Our Monthly Expenses Be?

What will our actual monthly expenses be after retirement, and how much will pension comfortably cover?

2. What Are Our Upcoming Financial Commitments?

Which large expenses and family responsibilities will require money from our retirement corpus over the next 5-10 years?

3. How Much Can Remain Invested?

After providing for these requirements, how much can remain invested for long-term growth and financial independence?

If you are already retired, these questions are just as relevant. There is no reason to continue with an unsuitable financial arrangement merely because the initial decisions have already been taken.

At Hum Fauji, we have worked exclusively with Armed Forces officers and their close family members since 2009. We understand why pension, ECHS, commutation, retirement benefits, second careers and family responsibilities must be considered together rather than as separate financial decisions.

Is Your Retirement Plan Aligned?

If you would like us to examine whether your pension, corpus and investments are properly aligned, simply reply to this email with your name, phone number and when you retired or expect to retire. Our team will connect with you to understand your requirements.

You can also request our Pre-Retirement Action Checklist or take the Retirement Readiness Check to identify areas needing attention.

Request the Checklist

Take the Retirement Readiness Check

You have worked hard to build your financial security during service. It would be unfortunate if the advantages you have earned were not used to make your next innings equally fulfilling.

Warm regards,

Col Sanjeev Govila (Retd)
CEO, Hum Fauji Initiatives

Missed Part 1 of This Series?

In our previous article, ‘Your Next Mission After Uniform Deserves a Plan’, we discussed why many officers postpone retirement planning until the corpus reaches their bank account, and how hurried financial decisions can affect their future.

Read Part 1 – Your Next Mission After Uniform Deserves a Plan

Next in the series: Commutation of Pension – Should You Take the Lump Sum or Not?