Planning whiz – July 2023

Financial Planning

Geojit’s Investment Analyst, Gibin John, helps a client working in a private firm assess his retirement plan. Gibin John analyses the client’s current investments and helps him plan ahead to lead a stress-free retired life.

I am Mahesh, aged 50. I have a daughter aged 19 years. I am working for a private firm and am planning to retire at the age of 58. My salary is Rs 2 lakh per month. I have a flat which is given on rent at the rate of Rs 15,000 per month. My living expense is Rs 50,000 and I pay an EMI of Rs 43,000. A loan outstanding loan amount of Rs 12 lakh will be cleared by May 2026. My equity investments are Rs 32 lakh in mutual funds and Rs 14 lakh in stocks. Also, I have Rs 10 lakh in fixed deposit. I am doing SIP of Rs 33,000 per month and depositing Rs 15,000 per month in recurring deposit. The accumulated amount in RD is Rs 1,95,000 and the maturity date is August 2024. I am writing this letter to know how much amount is needed to live a stress-free post-retirement life. I have already created the corpus for other life goals.

Gibin John, a Certified Financial Planner replies:

Planning for post-retirement life is one of the most important goals because during this period most people may not have a fixed flow of income. With a little retirement planning, you can avoid running out of money when you need it the most and have the power to fulfil your wishes while maintaining your financial independence.

Even if you don’t have any savings for other significant goals during your working years, you might be able to finance those goals by taking a loan, but during retirement it is difficult to secure a loan. You have successfully created separate corpus for goals like your daughter’s education and marriage. However, you haven’t saved up or invested money specifically for retirement.

We assume that all investments mentioned here are to save and invest for retirement. You are currently 50 years old and intend to retire at the age of 58. So, in eight years’ time, you will retire. Your current living expense is Rs 50,000 and EMI is Rs 43,000. If you need to maintain the same standard of living, you need to consider inflation also. If we assume an inflation of 6% then the living expense will increase to Rs 79,693 after eight years. For getting the inflation adjusted amount till the age of 80 you need to create a corpus of Rs 1.90 crore. If you get the average rent of Rs 22,000, considering the increase of 5% every year till retirement, the from your second flat then the target corpus can be reduced to Rs 1 crore.

Your existing investments are: Rs 32 lakh in equity mutual fund, Rs 14 lakh in direct equity, Rs 10 lakh in fixed deposit and Rs 1.95 lakh in recurring deposit. Firstly, you have to create a contingency fund. For this purpose, you may utilize your existing and future investments towards the recurring deposit. After the maturity of this account, you may shift 60% of the amount to liquid mutual fund.

Your net monthly income from salary is Rs 2 lakh and rental income is Rs 15,000. After deducting living expense and EMI, you have an investable surplus of Rs 1,22,000. You already have an investment commitment of Rs 33,000 towards SIP and Rs 15,000 towards recurring deposit. The amount of Rs 60,000 you may invest in debt mutual fund as SIP for building retirement corpus. If this investment fetches an average return of 7%, then the investment will become Rs 76 lakh in 8 years. Your existing equity SIP investments and direct equity will become Rs 1.16 crore and Rs 30 lakh respectively, assuming the return is 10%. Thus, you could create a total corpus of Rs 2.22 crore. This corpus will be insufficient to meet your expenses even if you don’t have the rental income.

Healthcare inflation in India is increasing alarmingly, it is doing so at a rate that is double that of retail inflation. While other financial objectives might be negotiable, health cannot be compromised. So having adequate health insurance during your sunset years is an absolute must. After your retirement, you will not be eligible for corporate health insurance coverage. So, you should purchase a health insurance coverage of Rs 15 lakh with top ups. For this purpose, you need to create a corpus to pay health insurance premium. After the home loan has been repaid in full, you can start a separate corpus for health insurance.

Contact STEPS, our financial planning division, to plan your financial future

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