Every call on a financial planning client is a huge learning. No two situations are alike.
- Smart husbands, irresponsible wives.
- Super wives, bum husbands.
- Husband and wife brilliant communicators, cannot talk to each other.
Been there, done it all. So I thought I will share some experiences.
Let us start with the anguished cry of a 38-year-old, who called me from Canada saying, "My maternal uncle needs help. Will you please visit him in Colaba?"
Off I went. He was a 63-year-old bachelor, who had lived life in full and was now at the fag end of his life. Literally at 30 cigarettes a day, he really was at the fag end. He needed medical, emotional and financial help. Cut the emotional and medical part, I really could not play too much of a role there. Let's come to his financials!
He had a net-worth of Rs 25 lakh (Rs 2.5 million) and a cash balance of Rs 15,000. The net-worth was a nice flat in Colaba. Apart from that, no shares, no fixed deposits, no national savings certificate, no insurance. Basically, no assets other than 3 millionaires as nephews staying abroad.
No cash to last him for even one month, let alone money for food, medicines, taxi to his sister's house. He had no cash. His sister was in another part of Mumbai, and constantly kept in touch.
He was not used to such a situation. He was a big-hearted man and had helped people all his lives. Had attended 500-odd funerals, helping in burials and cremations. Had liberally given pocket money to his nephews, had helped his sister buy a house. Paid for her daughter's wedding. It took him three months to tell me about his financial condition. But I was touched. He was too proud to ask.
I blasted his nephew the first time I saw him. Not a great way to start a relationship, surely not as a client and a planner. I suggested the nephews who were rich (okay, a relative term but all of them had one fixed deposit of $1 million in a foreign bank operating in Mumbai) 'buy' the flat and take possession of the same at a later date -- the doctors had anyway given him only about 36 months to live. I could not think of anything other than a reverse mortgage.
However, the story had a happy ending. The nephew felt rotten. He later told me he was too ashamed to see my face for a day, so he called me two days after he reached Mumbai.
The nephew said his uncle would feel insecure about an arrangement of reverse mortgage. So he asked for an alternative. I suggested a Rs 10 lakh (Rs 1 million) fixed deposit with a nationalised bank (where his uncle had a savings bank account) as an either or survivor and the interest being credited to his uncle's account. Done quietly.
No fan fare. Only 3 people knew about it -- the bank manager was extremely helpful -- he offered to use his personal cash in an emergency after banking hours. As human beings, we cannot thank him enough. The nephew was crushed by the help the doctor, the banker, the neighbours were offering. He thanked them a zillion times.
The uncle withdrew from the savings account only twice. Soon after this arrangement he died. But died a peaceful death: he passed away in his sleep. Surely satisfied that his nephew had paid attention to him.
More than 40 people attended his funeral -- none had any idea of his financial difficulty.
The nephew realised money is not about how much you have. It is about how useful it is for people around you. How you make it go around. It is about how good you feel using it. It is about how helpful it is for people around you who are too proud to ask. It is for people whom you love, but are now on hard times. It is about helping without hurting. It is realising how important money is for people who do not have it.
And I thought financial planning was about finance! It was a lesson in growing up.
So what was this reverse mortgage that I suggested to the nephew?
A regular mortgage (what we call a housing loan) is a forward mortgage, and hence it depends on the borrower's ability to earn and therefore repay the loan. A reverse mortgage on the other hand is a loan that looks only at the value of the asset, not at your current income at all.
For most senior citizens and those nearing retirement today, the biggest fear is the need for money to live comfortably after retirement. In their era, the only investment they made was in their Provident Fund and of course, they bought their own home, which is an extremely illiquid asset that doesn't generate cash if you're living in it.
Reverse mortgage can make the same home pay for your living expenses and that too, without having to move out of it.
I have structured three reverse mortgage deals for some senior citizens and this is how it works. Please be aware this product is not available officially in India. It is available only as a private arrangement between close friends or relatives.
Simply stating, a reverse mortgage is a loan that enables homeowners to convert part of their value in their home into a tax-free income without having to sell their homes, give up the title, or take on a new monthly mortgage payment. Many homeowners can use this to supplement their retirement income, pay for their health care, modify their home, or just get some cash for emergencies.
To be more explicit, in a reverse mortgage, the owner of the home agrees to mortgage his home for a specific period of time or till his death. Against the mortgage, he receives either a lump sum or a monthly payment or a combination of both. On death, the home is transferred to the person paying the monthly amounts or the legal heirs depending on how the agreement is structured.
Let us look at one case where I structured a reverse mortgage. A retired person in Bangalore had a lovely bungalow -- and was using a small portion of the house. It was a nice 6-bedroom + 2 halls + 2 garages + 2 kitchen house in a prime location built long ago.
The senior citizen -- Srinivasan -- and his wife were not keen to leave the house and move to a smaller house. Their two sons were abroad and showing no signs of interest in this property worth at least Rs 3 crore (Rs 30 million).
Srinivasan had retired as an executive director of a PSU -- about 20 years ago. He did not have a pension and his retirement corpus was evaporating. I structured a deal for him with his nephew who wanted to buy the bungalow.
The nephew has paid Rs 50 lakh (Rs 5 million) into a bank account of Srinivasan and his wife. Apart from this he will pay them Rs 15,000 per month as rent for the rest of their lives. At the end of their lives the house will go to the nephew.
Ravi, the nephew will pay all the statutory dues, upkeep, will paint the house once in 3 years, maintain the garden, and stay with them. His children have got 'grand-parents' and he has got a Rs 3-crore house (it has already shot up in the current boom to about Rs 4 crore -- or Rs 40 million) for Rs 50 lakh plus annual rent of Rs 1.8 lakh (Rs 180,000). Mrs. Srinivasan is currently 67 years old. On an assumption that she lives till the age of 80 years it is a deal that will run for the next 13 years.
While in this case, Ravi stayed with them, it is not necessary to do so.
While globally, reverse mortgages are carried out for people by banks and mortgage companies, in India, such an arrangement has yet to take place.
The author, P V Subramanyam is a financial domain trainer and can be contacted at pvsubramanyam@gmail.com.
For more on retirement planning, log on to www.moneycontrol.com
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