Planning whiz – December 2022

Plan for retirement

My wife is 37 years old and I am 38 years old, and both of us are employees of a private company. Our daughter is studying in 4th standard now. My wife makes Rs. 85,000 a month and I earn Rs. 1,15,000. Every month, our family spends Rs. 60,000.

Our major investments include, Rs.12 lakh in bank deposit and Rs. 1 lakh in mutual funds. We have two insurance policies, one of which is in my name and has a sum assured of Rs. 1 crore. I will be paying a premium of Rs. 20,000 per annum till I turn 70. The other policy is in my wife’s name, with Rs. 12 lakhs as the sum assured and she is paying a premium of Rs. 13,000. The maturity date is June 2025.

Coming to our goals, we are planning to buy a house/ flat worth Rs. 1 crore within the next 5 years. For the higher education of our child, we would require Rs. 20 lakh and Rs. 25 lakh for her marriage, when she becomes 25 years. We would like to know whether our investments are sufficient to achieve our goals and how we can best manage our finances.

Gibin John, a Certified Financial Planner replies:
Although you have a healthy cash flow, you still need to adjust your investment strategy. And a financial plan will provide a road map for achieving your goals and will aid you in understanding your present financial strength and weaknesses. Your family income is Rs. 2 lakh per month, and expenditure is Rs. 60,000 per month. Considering these numbers, your surplus is Rs. 1,40,000 each month.

Firstly, you have to set up an emergency fund for meeting unexpected expenses in the life. You can set aside Rs. 4 lakh from your bank deposit as an emergency fund. You may keep 30% of the amount in liquid mutual fund or savings account, and the balance amount can be invested in other short-duration mutual funds which provide fast liquidity.

Your immediate goal is to buy a house within 5 years. You estimate that it will cost Rs 1 crore to accomplish this goal. It is difficult to create an entire amount from the existing surplus in a short period. Let us consider this Rs. 1 crore as goal value. Then to generate this corpus, you need to invest Rs. 1,00,000 every month for the next five years in debt instruments or other risk-free investments. If this investment fetches a 6% return, you can generate a total of Rs. 70 lakh within this period. For the balance amount of Rs. 30 lakh, you may avail a home loan. If you avail a home loan with a 12-year term, till the age of 55, at 9% interest rate, then the EMI will be Rs. 34,000. You may set aside money from the surplus to pay this EMI. If you avail a home loan to build a house, you can claim tax benefits as well as you can utilise the piece of land for funding retirement corpus.

You have estimated the cost of your daughter’s higher education as Rs. 20 lakh, and you have 11 years to achieve this goal. At the goal date, this goal value will equal Rs. 47 lakh (assuming the rate of inflation for higher education is 8%). To generate this amount, you need to invest Rs. 20,000 per month in equity-oriented investments. The estimated rate of return for this investment is 10%.
For your daughter’s marriage, you are expecting a cost of Rs. 25 lakh. If this cost increases by 6% per annum you will require a corpus of Rs. 64 lakh. You need to invest Rs. 20,000 per month in equity-oriented investments to generate this corpus. The assumed inflation and return for this goal are 6% and 10% respectively.

In your communication with us, you have not mentioned your plans to invest for retirement. We advise that you create a corpus for use after retirement. At 6% inflation, your present cost of living of Rs. 60,000 will increase to Rs. 1,92,428 by the time you are 58. You must accumulate a corpus of Rs. 4.60 Crore by the time you retire, in order to maintain the same standard of living at least till you are 80 years old. After constructing your house, you can begin investing Rs. 1,15,000 every month in equity-oriented mutual funds until you reach retirement.

We suggest you take additional term insurance in your name and your wife’s name for Rs. 1 crore each. This will help in fulfilling the family goals even in your absence. If your company does not provide health insurance, we suggest you need to take a family floater policy with a minimum coverage of Rs. 5 lakh.

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like