Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. They want him to assist them in meeting their financial objectives, such as saving for their child’s education, purchasing a car, and retirement on time. Gibin John analyses their current investments and helps them plan to achieve their goals.
Q: I am a 34-year-old, working in a private firm. My family consists of my wife (33 years) and son (3 years). My son is studying in LKG. My monthly salary is Rs. 60000 and my wife’s salary is Rs.35000. Currently we are staying in a rented house. Our monthly living expense is Rs. 38000 and we are paying Rs. 15000 as rent. We are currently investing Rs. 5000 per month in a recurring deposit and Rs. 8000 in mutual fund. Our savings account balance is Rs. 2 lakh.
Now, I am writing this letter to get your advice on achieving our financial goals on time. We would require an amount of Rs. 10 lakh for son’s higher education and Rs. 10 lakh after 5 years for buying a new car. We are planning to retire at the age of 58 and assume our post retirement expenses to be around Rs. 25000 per month. Also, if the financial situation allows, we wish to buy a flat worth Rs. 50 lakh in next 10 years.
Please advise us on how to achieve these goals.
Gibin John, a certified financial planner replies:
A: It is encouraging to see that you have decided to plan for your goals and begin investing for them, particularly your retirement. After reviewing your profile, I have noticed that you are currently underinvested. Your existing savings bank account investment of Rs. 2 lakh can be designated as an emergency fund. This sum can be used for unforeseen expenses that may arise in the future.
Your total income is Rs. 95,000, while your total outflow for living expenses and rent is Rs. 53,000. The available net surplus for investment is Rs. 42,000. You will be able to save 44% of your income, which is commendable, but the investments you are accumulated are minimal. If you invest the full surplus in a disciplined manner, then you can create the corpus needed to achieve your financial goals.
First, let us analyse how to create a corpus for your son’s education. This goal is expected to cost you Rs. 10 lakhs. With an education inflation rate of 8%, the higher education cost when he is 17 years old will be Rs. 29.50 lakh. And to achieve this goal, you may invest Rs. 8,500 per month in an equity oriented mutual fund.
You are planning to buy a car after five years and you will need Rs. 13.50 lakh. You must put aside Rs. 14,600 per month in a conservative hybrid mutual fund to accumulate this sum. We assume that this investment will generate an annual return of 8% on average. We suggest you reduce the goal amount otherwise there will not be enough money left to fund your other goals. If you lower your objective to buy a car worth Rs. 7 lakh, the required corpus at goal date will be Rs. 9.50 lakh. You will then need to invest Rs. 10,200 to accumulate this sum.
Your next important goal is your retirement. You intend to retire when you are 58 years old, and your anticipated post-retirement expenses are Rs 25,000. At the time of retirement, 24 years from now, this expenditure per month would have increased to Rs. 1,01,223 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. 2.43 crore by the time you retire. You must invest Rs. 22,000 in equity-oriented mutual funds every month until retirement to build up this corpus within 24 years.
This leaves you with no investable surplus to invest and build a corpus to buy a house. After five years, after buying the car, you may start investment towards this goal. However, the amount accumulated will not be sufficient to buy a house. But we believe that your financial situation would improve as your salary may increase during this period and you will be able to invest more towards this goal. You can also avail a housing loan.
Your company may provide health insurance, if so, there is no need to take any additional health cover at this point. But we suggest you take a term insurance of minimum Rs 1 crore immediately.
Contact our financial planning division STEPS to plan your finance.