Planning Whiz – May 2022

Financial Planning

A couple working in the private sector wants to plan for their retirement, buying a car, and investing for their child’s education and marriage. Gibin John, Geojit’s Investment Analyst, analyses their current investments, and helps them plan to achieve their goals.

I am Hari, 43-year-old, working as engineer in a firm. My family includes wife (40 years) and daughter (9 years) who is studying in 4th standard. My wife works for a private firm. My monthly salary is Rs.70,000 and wife’s salary is Rs.45,000. Currently, we are staying in a rented house close to our office. We have taken a home loan of Rs.34.50 lakh at 8% interest and paying Rs.33,000 as EMI. We had made some additional payments towards the principal and so this loan will end in after three instalments. The property value is approximately Rs. 90 lakhs. Our monthly living expense is Rs.40,000 including education fees. We are currently investing Rs.7,500 in mutual fund every month and paying insurance premium of Rs.300 per month. Our savings account balance is Rs.1,90,000.

We both are working in private sector therefore we do not have defined pension plans after retirement. So, we need your advice mainly on retirement. We are planning to retire at the age of 55. After retirement we will require around Rs.25, 000 per month to meet living expenses. Our other goals are to accumulate an amount of Rs. 10 lakh for daughter’s higher education and Rs.15 lakh for her marriage. I am planning to buy a new car worth Rs. 12 lakh after 4 years. Request you to give us your suggestions to reach these goals.

Gibin John, a certified financial planner replies:
It’s good that you decided to plan for your goals and invest accordingly. Especially for your retirementas you will retire in around 12 years from now. Looking at your current portfolio, I have noticed that you have not made enough investments. Your existing savings of Rs 1.90 lakh in bank account can be kept aside as an emergency fund. This amount can be used to meet any unanticipated expenses which may come up in the future.

Your family’s current monthly income is Rs.1,15,000 and your monthly expense is Rs.73,000 including EMI. As mentioned, the EMI of Rs.33,000 will end after three instalments. Currently, you have a surplus amount of Rs.42,000 which you can utilise for investments. You are regularly investing around Rs. 8000 per month in mutual funds.

Firstly, let us see how to create the corpus for your child’s education. The expected cost for this goal is Rs. 10 lakh. Considering the education inflation of 8%, the higher education cost would be around Rs.20 lakh by the time she reaches college. For creating this corpus, you may invest Rs.12,500 in equity oriented mutual fund for the next nine years.

Your next goal is accumulating a corpus for your daughter’s wedding expenses by the time she reaches the age of 24 years. The expected cost in current terms is Rs.15 lakh. Taking inflation of 6% into consideration, this amount may rise to around Rs.36 lakh at the time of marriage. For creating this corpus, you will have to invest Rs.9,000 per month in an equity oriented mutual fund.You want to buy a new car worth Rs. 12 lakh after 4 years. To achieve this goal, you can utilize the investable surplus of Rs.20,500. If you allocate the entire amount, you can create a corpus around Rs.11 lakh. Hence, we suggest you reconsider the cost of the car you want to buy; we suggest you buy a car worth Rs.10 – Rs. 11 lakh. And if you are able to create additional amount without affecting the existing investment, then you may increase the goal amount.

The next goal you have set for yourself is very important. Planning for retirement will ensure that you can live a comfortable and carefree post-retirement life. You are planning to retire at the age of 55 and you are expecting Rs.25,000 as post retirement expense. After 12 years at the time of retirement this monthly cost will become Rs.50,304. For getting the inflation-adjusted expense during post retirement period till the age of 80 you will have to create a corpus of Rs. 1.35 crore at the time of retirement. For creating this corpus within 12 years you will have to invest Rs.50,000 per month till retirement. Once your home loan closes, that is after three months, you can use the EMI amount of Rs.33,000 to be invested for creating retirement corpus. Also, after four years you can reallocate Rs.20,500, which we have already allocated for car, for creating the corpus for retirement. We assumed that you would get a 10% return by investing in equity oriented investment. This will help you create a corpus of Rs.1.18 crore at the time of retirement. This amount will help you meet living expenses equivalent to the current monthly cost of Rs.22,000.You have not mentioned about the holding value of current mutual fund SIP. So, we have not considered this value for our calculation. You may use this amount for retirement corpus creation.

We also suggest you take a health insurance of a minimum of Rs. 5 lakh as a family floater to include your family members. Later, you can buy a separate health policy or request your insurer to upgrade the plan by Rs. 5 lakh. Hope you got some clarity and direction to manage your future financial goals.

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