Planning whiz – November 2022

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. They want him to help them with financial planning which includes buying a car, house, child’s education and retirement planning. Gibin John analyses their current investments and helps them plan to achieve their goals. 

I am 29 years old and working in a private firm. My family consists of my wife (29 years) and son (2 years). My monthly salary is Rs. 84,000 and my wife’s salary is Rs.49,000. Currently we are staying in a rented house. Our monthly living expense is Rs. 38,000. I am paying Rs. 18,000 as rent. We are currently investing Rs.15,000 per month in a recurring deposit and Rs. 10,000 in a mutual fund. The savings account balance is Rs.6,00,000. 

We are planning to buy a flat worth Rs. 65 lakh within the next three years. Also, we would require an amount of Rs. 15 lakh for our son’s higher education and Rs.15 lakh after four years to buy a new car. We are planning to retire at the age of 55. After retirement, our living expenses may be around Rs.30,000 per month. 

Please advise us on how to achieve these goals.

Gibin John, a Certified Financial Planner replies: 

Feels good to see that you have decided to plan for your future and start investing accordingly, especially for your post-retirement life. Generally, at this age, people are not ready to allocate time to create a financial plan and set their investments accordingly. On analyzing your profile, currently, you haven’t done enough investments. Firstly, from your existing investments of Rs 6 lakh in the savings bank account, Rs. 2 lakh can be earmarked as an emergency fund. This amount can be used for unpredictable expenses which may incur in the future.

Your total household income is Rs. 1,33,000 and the total outflow for meeting living expenses and rent is Rs. 56,000. The net surplus available for investment is Rs. 77,000. Currently, you are investing Rs. 25,000 per month in recurring deposits and mutual funds.

Your immediate goals are to buy a flat and a car. And you want to achieve both these goals within four years. Firstly, let us look at how you can create a corpus for buying the flat. Your expected cost for this goal is Rs. 65 lakhs. Considering an inflation of 6%, this cost will become Rs.77.5 lakh in three years’ time. It is difficult to create the entire corpus in this short period therefore you need to depend on a home loan. You may allocate Rs. 47,000 towards this goal and if the investment fetches 6.50% interest, then you can create Rs. 18.50 lakh for this goal. For the balance amount, you will have to take a loan of Rs. 50 lakh. You need to pay Rs. 52,000 as EMI for the next 20 years towards this loan. If possible, reduce the goal amount, then your loan amount will also reduce accordingly.

Your next goal is buying a car worth Rs. 15 lakh. Taking inflation into account, you will need Rs. 19 lakh to buy a car after four years. For accumulating this amount, you may allocate Rs. 30,000 per month to a recurring deposit or a debt-oriented mutual fund. This investment will become Rs. 16 lakh on the goal date and the balance amount of Rs. 3 lakh you may take from your savings account. For this, you can invest Rs. 2.50 lakh from your savings account in a debt mutual fund or recurring deposit. If the investment fetches a 6.5% of return, then the investment will become Rs. 3 lakh on the goal date.

Expected cost for your son’s education is Rs. 15 lakhs. Considering education inflation of 8%, the higher education cost will become Rs. 47.50 lakh when your son becomes 17 years old. To achieve this goal, you may invest Rs. 20,000 per month in an equity-oriented mutual fund after you have bought the car.

Your next and most important goal is retirement. You are planning to retire at the age of 55 and you are expecting Rs. 30,000 as post-retirement expenses. After 26 years at the time of retirement, this monthly cost will become Rs.1,37,000 due to inflation. For meeting this inflation-adjusted expense during the post-retirement period till the age of 80, you will have to create a corpus of Rs. 3.65 crores at the time of retirement. To create this corpus within 26 years, you will have to invest Rs.40,000 per month till retirement in equity oriented mutual fund. Now you have no sufficient funds to invest so you may start after four years, after buying the car, towards your retirement goal.

You did not mention the holding value of the current mutual fund SIP and RD. So, we are not considering this value for our calculation. You may use this amount for any goal or loan repayment. Use equity mutual funds for long-term goals and debt investments for short-term ones. 

We are assuming that your employer offers health insurance coverage, however we suggest that you ensure you and your family have at least Rs. 5 lakhs worth of health insurance. You have also not mentioned about the life insurance coverage in your letter. We also recommend you purchase a term insurance of a minimum of Rs.1 crore for you and  Rs.50 lakhs for your spouse.

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