Retirement planning - Article 4 - by Amit Sangwan

Article 4
Retirement Planning : NFU, OROP, COMMUTATION and MINDSET ABOUT MONEY

11May 19

BY Amit Sangwan

Disclaimer
I am shifting from the term PMR to a more broadbase one of retirement to include superannuating officers and ssc officers. Also the PMR thing was becoming a bit negative. Having re read my own articles i felt unintentional  message of leaving fauj was going.That was never the aim.  So I am doing a course correction. Henceforth things will be more factual and academic. How you use it is individual choice. Also read the following with a pragmatic approach because most of it may not sound nice initially.Second read it may  will sink in .

1. NFU

(a) Too much unnecessary hue and cry in Fauji circles about this. In civil services one retires at 60 years. Promotion avenues always open there. Not restricted to 3 boards.In armed forces an officer may miss all 3 boards before 40 years of age. So even thinking and comparing with civil services is foolishness.What people want is having missed their  Col board they should get General sahab pay because they think in civil its happening that way.

(b) I will attempt to clear it.Not many have attempted before. Great risk of being trolled by your own.

(c) As per NFU ,officers 2 years senior in service automatically get finiancial upgrade when an IAS of particular batch (2 yrs junior) picks a promotion. Like joint secretary at 17 years. So all Gp A at 19 will pick.

(d) But for that you have to be one rank lower. So a Col who has missed all his boards will pick brig nfu when his coursemate has been brig for 2 years.This is how it will come if ever it comes. Similarly a brig will get nfu for major general when his coursemate has been major general for 2 years.

(e) For Lt Col it will be 2 years later so instead of 26 years it will come to 20 or 21 years. Now when their coursemates become brig ,these lt col will not get brig nfu 2 years later because you have to be one rank lower to get next nfu.Not 2.

(f) In civil services that is never an issue because officers are not sealed at a particular rank. Plus residual service is so much invariably slowly they keep rising and most retire at HAG if not HAG plus.

My take on issue is
Do not waste time and energy on this.It comes under gambit of Garib mindset.Something I will delve later on. Its interpretation and implementation not under our control . Time  and energy limited .Spend them on thinking bigger things.

2. OROP

(a) Similar lines as above, another energy sucker and hope finisher  word.

(b) Orop will not affect post 2016 retirees. A Colonel  of 20 years will have basic pay X. Colonel of 32 years service will have basic Y. So whoever retires as Col at 20 yrs his pension will be same as that Col who retired 4 yrs back at same 20 years.Same case for 32 years superannuating ones at 54 years.

(c) So till time , terms of service dont change orop requirement will not kick in. Example now Lt  col becomes in 13 years. Earlier TS  Lt  Col was 21 years. So 8 increments difference created anamoly between pre 2006 and post ones.

(d) Also it needs to be noted that a Col retiring at 54 years will have higher pension than one Col retiring at 20 years  because his basic pay is higher by 12 increments. Orop has no role to play  in it. So rumour and fear being spread that you will lose out because of orop is wrong.

(e) But 20 years Col is getting 1 cr benefit on retirement. If he continues for 12 more years retirement benefit will be 1.5 cr.But 1 cr of 2019 inflation and growth rate adjusted ( hurdle rate 9 percent) in 2031 will be 2.5 cr . So how do you account for this 1 cr loss. Growing at 8 to 9 percent is not difficult. Also 7th pay commission is last one.Now DA will merge with basic.Factor same for serving and pensioners.

My take is endlessly discussing and being fascinated by Orop not required.Technically there may still exist an anamoly of 2 to 3k between pension because of something called bunching up of pay scale in 7th  pay commission . Where in 2 to 3 courses draw same basic. But will you devote your life to it. Remember 2 courses out of 3 would actually gain from it. Only a particular course will lose out. Too much fighting for not understood causes will result in government reducing pension for the 2 courses. No one will gain. Phir atma main sukoon aa jayega. We faujis are masters in doing such stuff.

3. Commutation

Whether to commute or not commute is the  question

(a) Instead of a straight forward answer i will list conditions when you should commute. So people can make a choice.

(b)  Commutation calculation i have explained in previous article. Basically its loan of 45 lakh for 20 yr lt col for 15 years at 8 percent. Given to government at 8 percent if you dont commute. 8 percent is what you get. Every one more  year of servive put amount increases by 2.85  percent ( increment of 3 percent  only on basic  pay and not on msp.But for pension msp taken)

(c) Commute the pension if

(i) You can grow commuted money more than 8 percent.

(ii) If you have a pending loan of above 15 lakh. If loan is at 9 percent returning it from commuting amount is equivalent of earning 9 percent. Dont think of tax rebate on loan here(its restricted to 60 k only).

(iii) You are emotionally stable and can say no to any  relative who wants to take this amount as loan.

(iv) You are sure no impulsive buying will be done by you.

(v) You are sure of picking up a job.If you dont commute that added pension will attract 31 percent tax. Commuted amount does not attract tax . It can be invested in adult kids or wife name. The return on that will not attract much tax.

(vi) You are financially wise. You can invest and earn more than 10 percent.

My take on commutation

If your retirement PF is like 70 to 80 lakhs or more and you dont know how to handle money please don't commute. Because nobody will cheat you of extra 50k per month. But extra 50 lac is a sweet target. If you are below 45 repay loan if any.For senior superannuating guys dont commute.

4. Mindset regarding money

(a) Retirement benefit of 1 to 1.25 cr and a PF of 1 cr is making people jittery.
Reaction is of panic.Like murder ho gaya hai aur laash(this 2 crore corpus)  kaise thikane lagayi jaye.

(b) Bas koyi bata de ki kitna FD kitna Mf kitna post office kitna yeh aur kitna woh.

(c) Then we will ask is it safe. Returns 12 percent .R u sure.

(d) We faujis are toughest to give advise to and most demanding. Always skeptical.  But despite all this bewakoof bhi sabse pehle and sabse jyaada fauji ka hi banta hai.
Name any ponzi scheme city limousine kinds and sizeable fauji will be there  .We just escaped sharda scam because fauj is less in west bengal.

(e) Reason for above mindset is we faujis have victim mindset. That we are somehow missing out on oppurtunities and  people in civil have better chances of making money. This fear of missing out (FOMO) makes us  commit such mistakes.

(f) Garib mindset

When you train your mind to think of ration money and orop thing  or managing guest rooms, then you are restricting it to few thousands.  Doesn't help.

(g)  We are afraid to take PMR because you dont know your worth outside.
But how will you know what happens outside when in the limited 7 to 10 days when you go on vacation , you want to stay in a fauji set up.Fauji guest room. Why not a 5 star hotel or resort. Hope people dont get offended by this. Just trying to bring a point.If u dont expose yourself n kids to different rich environment ,how will you know how things operate there.

5. Actionable points

(a) Please get out of
Sab Mauj Main Aur Hum Fauj Main mindset.
Self pity never helps.

(b) Dont waste energies on nfu orop and fighting civil servant lobby. We are better than them chant doesnt help.We have a role to play. They have a role to play. Whining constantly will make  you feel like a rondumal.

(c)  Dont buy cars worth 16 lakh if u ever want to leave early. Its not living life. Will do  a small piece on this.

(d) Read book Intelligent Investor by graham.

I will do that 10 percent thing.But after some time.1 month.

Before that certain tools to deal and understand money have to be taught.
My understanding people here not comfortable with thinking about money.1 cr or 2 cr appears to be a lot. This is small amount when you think 20 years hence.

Notes

1. When one does resettlement course at IIM confidence comes. Reason is there they talk in crores. Normally hundred of crores. Refreshing change from speculating whether ration per day should be 97 rs or 207 rs.

2. Phone calls to me have reduced which is a relief. Any doubt in this one you can post a query.

3. If anything written above hurt anybody s sensibilities than i am not sorry as it was intentional. To expose yourself to larger possibilities which life holds.

4. Its ironical that

Baharwale ( civilians) Fauj Main Aane Se Darte Hain (marne ka darr) .
Aur Fauji Bahar Jaane (retirement) Se darte hain (jeene ka darr).

5. People who have the talent and courage to face death should also develop talent and courage to face life.

More on this how to achieve this tangibly in real world in next one.

Pls continue on this journey of trying to live a purposeful life.

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